GREAT EASTERN SHIPPING CO. LTD. versus STATE OF KARNATAKA & ORS. on 4 December 2019

SUPREME COURT REPORTS

[2019] 17 S.C.R.

ATHE GREAT EASTERN SHIPPING CO. LTD.

v.

STATE OF KARNATAKA & ORS.

(Civil Appeal No. 3383 of 2004)

B DECEMBER 04, 2019

[ARUN MISHRA, M. R. SHAH AND B. R. GAVAI, JJ.]

Karnataka Sales Tax Act, 1957:

s.5C r/w. Art.366(29A)(d) of the Constitution of India –CCharter Party Agreement – By the company (owner of the ship)with Manglore Port Trust for a period of six months – Notificationby the Revenue asking the company to get itself registered as adealer under the Act, as the agreement attracted tax u/s.5C of theAct – The company repudiated its exigibility to tax on the groundthat it had not transferred the rights to the Port Trust – Writ petitionDinter alia on the ground that the Act does not extend to territorialwaters of India and hence State not authorised to levy tax – SingleJudge as well as Division Bench rejected the case of the company– Appeal to Supreme Court – Held: In the facts of the present case,the Charter Party Agreement tantamount to a deemed sale as thereEwas a transfer of right to use the vessel as provided inArt.366(29A)(d) r/w. 5C or s.2(j) of the Act – For realization oftax imposed within the ken of power u/Art.366(29A)(d), it is notmaterial where the goods are passed, but the situs of agreement isdeterminative for realization of tax – Thus, location of delivery ofgoods cannot be made the basis for levy of tax on the sale of goodsF– The question as to extent of power of coastal ”State with respectto territorial waters, is left open – Constitution of India –Art.366(29A)(d).

Dismissing the appeal, the Court

GHELD: 1.1 A tax on the sale or purchase of goods includesa tax for transfer of right to use goods as that is deemed to bea sale. The tender documents pursuant to which agreement hasbeen entered into contains the conditions and instructions totenderers. The pre-qualification criteria provide that thetenderer has to submit the documents regarding ownership orH

possession of tug on bareboat/committed demise charter hireof tugs. In case he does not own the tug, he has to providedocuments to prove that he has entered into a lease for charterhire of tug(s) for deploying them in the Port Trust during theperiod of the contract. The tenderer should have experience ofmanning and harbor practice for one year during the last 3 years.Tugs should be deployed at harbors at New Mangalore Portduring the contract period. [Para 22] [873-B-D]

1.2 As per the Charter Party Agreement, Annexure I, thevessel has been taken by the Port Trust for various lawfulservices required by the chartered Port Trust, including towing,docking, and undocking at the Port round the clock for thecontract period of 6 months. The contractor that is the companyhas to provide the cost or expenses related to the vessel, hermaster and crew, whereas the charterer to provide fuel,lubricants, water, electricity, port charges, and for anti-pollutants.The provisions for maintenance and operation are also containedin the agreement. As per clause 7, the vessel shall during thecharter period be for all purposes at the disposal of thecharterers and under their control in every respect, whereas themaintenance part is with the contractor company. The charterershall have the use of all outfits, equipment, and appliances onboard the vessel at the time of delivery. Insurance charges haveto be borne by the contractor. The vessel shall be kept insuredby the contractors at their expense against protection andindemnity risks. The whole reach and burthen of the vessel,including the lawful capacity to be kept at the charterer’sdisposal. [Para 27] [882-D-F]

1.3 On perusal of the various terms and conditions of theCharter Party Agreement (Annexure I), clause 1 provides thatthe contractors “let” and the charterer “hire” the goods vesselfor six months. The expression ‘let’ has been used, and thevessel most significantly during the charter period has beenplaced at the “disposal” of the charterers and under their controlin every respect. The charterers have been given the right touse all outfits, equipment, and appliances on board the vesselat the time of the delivery, including the whole reach, burthen,and deck capacity. Thus, merely by providing the staff, insurance, AB

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Aindemnity, and other responsibilities of bearing officials costs,effective control for the entire period of six months has beengiven to the charterers. It is a case of transfer of right to usethe vessel for which certain expenses and staff are to beprovided by the contractor, which is not sufficient to make outthat the control and possession of the vehicle are with theBcontractor. The possession and control are clearly with thecharterer. There is not even an iota of doubt that under thecharter agreement coupled with the instructions to tenderers,general conditions and special conditions for the contract asspecified in the tender documents and charter-party clauses,Cthere is a transfer of right to use the vessel for the purposesspecified in the agreement. [Para 33] [884-C-F]

1.4 To constitute a transaction for the transfer of right touse of goods, essential is, goods must be available for delivery.In the instant case, the vessel was available for delivery and inDfact, had been delivered. There is no dispute as to the vesseland the charterer has a legal right to use the goods, and thepermission/licence has been made available to the charterer tothe exclusion of the contractor. Thus, there is complete transferof the right to use. It cannot be said that the agreement and theconditions subject to which it has been made, is not a transferEof right to use the goods, during the period of six months, thecontractor has no right to give the vessel for use to anyone else.Thus in view of the provisions inserted in Article 366(29A)(d)of the Constitution of India, Section 5C, and definition of ‘sale’in section 2 of the Karnataka Sales Tax Act, there is no roomFfor doubt that there is a transfer of right to use the vessel. [Para34] [884-G-H; 885-A]

1.5 Applying the substance of the contract and the nominalnature test, the vessel was available when the agreement for theright to use the goods has taken place. The vessel was availableGat the time of transfer, deliverable, and delivered and was at theexclusive disposal for six months round the clock with thecharterer port trust. The use of license and permission was atthe disposal of the charterer and to the exclusion of thecontractor/transferor. It was not open to the contractor to permitthe use of the vessel by any other person for any other purpose.H[Para 37] [888-F-G]

1.6 The Court is not turning the decision upon the termsused like ‘let’, ‘hire’, ‘delivery’ and ‘re-delivery’ but on the otheressential terms of the Charter Party Agreement entered in theinstant case which clearly makes out that there is a transfer ofexclusive right to use the vessel which is a deemed sale and isliable to tax under the KST Act. In the instant case, full controlof the vessel had been given to the charterer to use exclusivelyfor six months, and delivery had also been made. The use bycharterer exclusively for six months makes it out that it isdefinitely a contract of transfer of right to use the vessel withwhich the Court is concerned in the instant matter, and that is adeemed sale as specified in Article 366(29A)(d). It depends uponthe terms and conditions of the charter-party when it is to betreated as only for service and when it is the transfer of right touse. [Para 43] [897-H; 898-A-C]

1.7 In a charter-party by demise, it may be charter withoutmaster or crew or bareboat charter, and another may be acharter with master and crew under which ship passes to thecharterer for the purposes of mercantile adventure. As held inthe present case, full control has been given, and use isexclusively for the charterer. He has the right to use the spaceand burden. [Para 52] [904-C-D]

1.8 It is not correct to say that charter agreements are onlyfor service purpose. It depends upon the charter-party, and thereis no super-check formula to find out the nature of the contract.It depends upon the terms and conditions of each contract.Merely use of specific words is not determinative, but the realcrux is to be seen as per relevant conditions as agreed tobetween the parties. [Para 53] [904-E-F]

1.9 It is not correct to say that as per the scheme of theHarbour Craft Rules the owner retains the control of the vessel.Merely by ss. 4, 6 and 8 of the Harbour Craft Rules whichpertain to license, its production/change of ownership etc., itcannot be said that the owner has not transferred the right touse the vessel. The ownership in such a deemed sale is retainedby owner. He does not cease to be an owner by transferring rightto use the property. Merely by the fact that a license to beobtained with certain stipulations and to be produced by Tindal AB

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Aon being demanded and change incapacity to be reported to theDeputy Conservator, the provisions are not of any help forinterpreting the Charter Party Agreement, and to decide thequestion whether there is a transfer of right to use the vessel.[Para 55] [905-C-E]

B1.10 Therefore, the Charter Party Agreement tantamountto a deemed sale as there was a transfer of right to use thevessel as provided in Article 366(29A)(d) read with section 5Cor section 2(j) of the Karnataka Sales Tax Act. Thus, thetransaction is liable to be taxed by the concerned authorities inthe State of Karnataka. [Paras 68] [916-C]C

Bharat Sanchar Nigam Ltd. & Anr. v. Union of India& Ors., (2006) 3 SCC 1 : [2006] 2 SCR 823 ; BritishIndia Steam Navigation Co. Ltd. v. ShanmughavilasCashew Industries & Ors., (1990) 3 SCC 481 : [1990]1 SCR 884 – relied on.

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State of A.P. & Anr. v. Rashtriya Ispat Nigam Ltd.,(2002) 3 SCC 314 – distinguished.

DLF Universal Ltd. & Anr. v. Director, Town, andCountry Planning Department, Haryana & Ors.,(2010) 14 SCC 1 : [2010] 15 SCR 85 ; Union of Indiav. Gosalia Shipping (Pvt.) Ltd., (1978) 3 SCC 23 :[1978] 3 SCR 943 ; State of Tamil Nadu & Ors. v. Tvl.Essar Shipping Ltd. & Ors., (2012) 47 VST 209 (Mad.)– referred to.

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In re: An Arbitration between sea and land securitiesLtd. and William Dickinson & Co. Ltd. The Alresford,(1942) 2 KB 65 ; Scandinavian Trading TankerCo. A.B. v. Flota Petrolera Ecuatoriana, (1983) 2 LLR253 ; Port Line, Ltd. v. Ben Line Steamers, Ltd. (1958)1 AER 787 ; Torvald Klaveness A/S v. Arni MaritimeCorporation (1993) 2 LLR 335 ; SkibsaktieselskapetSnefonn, Skibsaksjeselskapet Bergehus, and Sig.Bergesen D.Y. & Co. v. Kawasaki Kisen Kaisha Ltd.(1975) 1 LLR 422 ; Hyundai Merchant Marine Co.Ltd. v. Gesuri Chartering Co. Ltd. (1991) 1 LLR 100– referred to.

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Halsbury’s Laws of England, 4[th] Edn., Vol. 43 –referred to.

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Halsbury’s Laws of England, 4[th] Edn., Vol. 43 –referred to.

2. For the realization of tax imposed within the ken ofpower under Article 366(29A)(d), it is not material where thegoods are passed, but the situs of the agreement isdeterminative for the realization of tax. The location of thedelivery of goods cannot be made the basis for the levy of taxon the sale of goods. Where a party has entered into a formalcontract, and the goods are available for delivery irrespectiveof the place where they are located, the situs of sale where theproperty or goods passes, would be at the place where thecontract has been entered into. In the present case, theagreement has been admittedly signed in Mangalore, and thevessel is used in the territorial waters, which is as per thesubmission of the company, fully in territory of the Union of India.It makes no difference as the situs of the deemed sale is inMangalore. [Paras 57, 58] [905-G-H; 908-G-H; 909-B-C]

20[th] Century Finance Corporation Ltd. v. State ofMaharashtra, (2000) 6 SCC 12 : [2000] 1 Suppl. SCR 120 – followed.

Aggarwal Brothers v. State of Haryana & Anr., (1999)9 SCC 182 : State of Orissa & Anr. v. Asiatic GasesLtd., (2007) 5 SCC 766 : [2007] 6 SCR 1182 –referred to.

3. With respect to territorial waters, to what extent thecoastal State can exercise power has been considered by theHigh Court, and specific findings have been recorded. The HighCourt has gone into the question of whether the territorialwaters abutting the landmass form part of the State of Karnataka.It was not disputed that the extent of territorial waters is up to12 nautical miles from the landmass that is the baseline. Article297 has been considered by the High Court and the Lists in the7[th] Schedule of the Constitution. Entries 25 to 27 and 30 of ListI, Entry 32 of List III, i.e., Concurrent List have been referred.The High Court has also relied upon the definition of State asprovided in Section 2(j) of the Marine & Fishing Act, 1986,Entries 13 and 21 of State List II of the 7[th] Schedule and inrespect of fisheries Entry 21 of List II. However, as the High A

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ACourt has given a finding, and on being impleaded, coastal Stateshave filed their response as notices were issued to them. TheCourt need not go into the question in respect of the right ofthe States and the Central Government as to territorial watersat all, because of the finding concerning exaction of tax underthe KST Act owing to situs where the transfer right to use theBvessel, which is a deemed sale, had taken place. As such, thequestion is left open and the finding recorded by the High Courtin this regard is diluted. [Paras 63- 65] [914-H; 915-A-E]

Baliram Waman Hiray v. Justice B. Lentin, (1988) 4SCC 419 : [1988] 2 Suppl. SCR 942 ; P.T. Rajan v.CT.P.M. Sahir (2003) 8 SCC 498 : [2003] 4 Suppl. SCR84 – referred to.

Case Law Reference

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3383of 2004.

From the Judgment and Order dated 23.01.2004 of the HighCourt of Karnataka, Bangalore in Writ Appeal No. 5526 of 1999.

Tushar Mehta, SG, Balaji Srinivasan, AAG, Arvind P. Datar,Mohan Parasaran, Arijit Prasad, Devadatt Kamat, Sr. Advs., AmarDave, Mahesh Agarwal, Rishi Agrawala, Anshuman Srivastava, ParulShukla, Ms. Devika Mohan, Rohan Talwar, E. C. Agrawala, KanuAgrawal, Mrs. Anil Katiyar, V. N. Raghupathy, Aditya Bhat, JavedurRahman, Rajesh Inamdar, Parikshit P. Angadi, Ashwin G. Raj, ManendraPal Gupta, Mrs. Shally Bhasin, Ms. Hemantika Wahi, NishantRamakantrao Katneshwarkar, Anoop Kandari, G. Prakash, JishnuM. L., Ms. Priyanka Prakash, Ms. Beena Prakash, Ms. A. Jaswanthi,Ms. P. Mitra, K. V. Vijayakumar, P. Venkat Reddy, Prashant KumarTyagi, P. Srinivas Reddy, M/s. Venkat Palwai Law Associates,Shibashish Misra, S. Debabrata Reddy, Chandan Kumar Mandal,Suhaan Mukerji, Ms. Astha Sharma, Abhishek Manchanda, Ms. KajalDalal, Prastut Dalvi, Ms. Dimple Nagpal, Naveen Kumar, M/s. PLRChambers and Co., Merusagar Samantaray, K. Luikang Michdel,G. N. Reddy, Ms. Sujatha Bagadhi, T. Vijaya Bhaskar Reddy,Ms. D. Priyanka, Anirudhha P. Mayee, Advs. for the appearing parties.

The Judgment of the Court was delivered by ARUN MISHRA, J.

1. The question involved in the appeal is whether it is open tothe State of Karnataka to levy Sales Tax in view of the Time CharterAgreement dated 8.1.1998 and whether it amounts to transfer of theright to use goods within the meaning of section 5C of the KarnatakaSales Tax Act, 1957 (for short, “the KST Act”) read with Article 366(29A) (d) of the Constitution of India.

2. The appellant – The Great Eastern Shipping Co. Ltd. filed awrit petition questioning the competence of the State Government toimpose a sales tax in respect of the goods which are used within theterritorial waters of India. The appellant owns a tug (towing vessel,namely “Kumari Tarini”). The company entered into a Charter Party A

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AAgreement with New Mangalore Port Trust on 8.1.1998. It agreed tomake available the services of tug, for the purposes provided in theagreement along with the master and other personnel of the companyto the Port Trust for six months.

3. The Assistant Commissioner of Income Tax vide notificationBdated 8.6.1998 directed the company to register itself as a dealer underthe provisions of the KST Act on the ground that the agreementattracted tax under section 5C thereof. The company in the reply dated26.6.1998 repudiated the claim on the ground that there was no transferof right to use the goods given by the company to the Port Trust as the possession and custody of the tug continued with it. The AssistantCCommissioner sent another communication dated 28.12.1998 informingthat last chance was given to the company to get itself registered underthe KST Act within 15 days failing which he would be compelled tofile charge-sheet against the company for the offence under section29(2)(aaaa) of the KST Act. The Joint Commissioner of Income TaxD(Commercial Taxes) on a query being made by the company wrote thathe was not the competent authority to issue a clarification regardingliability or otherwise to pay tax under section 5C of the KST Act.

4. The company filed a writ petition on the ground that the KSTAct does not extend to territorial waters of India situated adjacent toEthe landmass of the State of Karnataka. Thus, the State is not authorisedto exact any tax on the hire charges received from the Port Trust. Thelearned Single Judge dismissed the writ petition, aggrieved thereby thecompany preferred a writ appeal. The same has also been dismissed;hence, the appeal has been filed. A Division Bench of the High Court

of Karnataka has rejected the submission raised by the appellant thatFover the territorial waters State of Karnataka has no power. The learnedSingle Judge was not justified in refusing to consider the question,whether there was a transfer of right to use the tug. It held that therewas a transfer of right to use the tug by the company to the Port Trust.

5. Shri Arvind Datar, learned senior counsel appearing on behalfGof the company submitted that the Time Charter Agreement dated8.1.1998 does not amount to transfer of right to use goods within themeaning of section 5C of the KST Act. It was only a contract ofservice. The contract is for the hire of a tug on payment of Rs.1.5 lakhper day. The expression used in the agreement is ‘service.’ TimeHCharters world over are considered a contract of service. There is a difference between the ‘right to use goods’ and ‘the transfer of theright to use goods.’ In case of a lease, there is a transfer of an interestin the property, whereas, in a licence, there is a mere right to use theproperty. The Time Charter is recognised as an agreement in the natureof pure service. They are entirely distinct from Bareboat CharterAgreement or charter by demise. The charters are of three kinds viz.(a) Time Charter, (b) Bareboat Charter or Charter by Demise, and (c)Voyage Charter. Time charter and voyage charter are contracts ofservice, whereas bareboat charter amounts to transfer of right to usethe ship itself. In a time charter, master and crew are in the employmentof the owner, and complete control, ownership, and possession of thevessel remain only with the owner through the master and crew. Thedelivery to the Port Trust is only a symbolic one, and the legal andphysical possession of Tug continues to be with the company. Thus,the arrangement is a service, not a lease. Learned senior counsel hasmade reference to Scrutton on charter parties, Halsbury’s Laws ofEngland, and have also relied upon various decisions.

6. Mr. Datar has further submitted that the Port Trust cannotuse the Tug for any purpose except, as mentioned in clause 3 of theAgreement. The Port Trust cannot take away the Tug outside theharbour limits of the Port Trust. Legal possession and fiscal control hadnot been transferred to the Port Trust, and only a conditional use ofthe vessel has been given. The use of the words ‘at the disposal ofPort’ in clause 7 is a standard term used in all charter agreements, andthese do not indicate the transfer of legal possession or transfer of fiscalcontrol. The contract indicates various liabilities and responsibilities ofthe owner; the insurance has to be provided by the appellants. For theperformance of service, the Bank Guarantee also has to be given. Theowner is responsible for damage to his Tug, Jetty, port premises, or anyother vessel in the port. The company is responsible for providingindemnity to the charterer. Thus, the owner has not lost his control overthe vessel.

7. It is further urged that if the vessel is at the disposal of thePort Trust, does not mean that there is a transfer of right to use it. Theexpression must be understood in a proper context of the agreementitself. It would be absurd to suggest that the vessel can be partly inpossession of the Port Trust and partly with the company. Anyinterpretation otherwise of the contract may create mayhem in thescheme of indirect taxation in India.

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A8. Mr. Datar has also referred to international laws relating totime charter and Bareboat Charter Agreements that have been inexistence for more than 100 years. According to him, the time charterhas always been treated as a contract of service. He has relied on theMinistry of Finance, Department of Revenue, a clarification dated18.6.2008 issued on the basis of detailed examination and analysis ofBthe Charter Party Agreements entered by shipping companies with theircharterers and have clarified that vessels fall under the category oftangible goods. A charterer acquired the right to use the vessel withouthaving the right to possession or effective control of the vessel.Therefore, the consideration paid for chartering of vessels is liable toCservice tax under the category of ‘supply of tangible goods for use byway of service without possession and control.’ The fact that timecharters are subject to service tax and bareboat charters are subjectto sales tax, which indicates that time charters are contracts of service.If they involved a transfer of right to use, Parliament would never havesubjected them to service tax.D

9. Mr. Datar, learned senior counsel has also submitted thatusually, only the Parliament can make laws relating to territorial waters.Under Article 246(4), read with Article 286, Parliament can make fiscallaws relating to imposition of tax on either supply of goods or servicesor both, where such supply takes place outside the State. Thus, even ifEthe situs of agreement fell in the territory of State, it would be of norelevance as the vessel has to ply in territorial waters. An agreementcannot be signed in the high seas.

10. It was submitted that the High Court has erred in treatingthe territorial water as part of the territory of Karnataka, in contraventionFto Article 297 as well as the provisions of the Territorial Waters,Continental Shelf, Exclusive Economic Zone, and other Maritime ZonesAct, 1976 (Act of 1976). None of the maritime States have been giventhe territorial waters as part of their territory. He has also referred toDr. Ambedkar’s speech in the Constituent Assembly to submit that theentire territorial waters would exclusively belong to the Union, and it isGonly by way of an exception through Entry 21 in List II that “fisheries”has been kept under the control of a State Government. The StateGovernment is, thus, competent to regulate fishing up to the territorialwaters. The same would again be restricted by Entry 57 of List I, whichprovides that fisheries beyond the territorial waters would be under theHcontrol of the Union as per Entry 21, List II. The Karnataka Marine and Fishing (Regulation) Act, 1986 (Act of 1986) was passed by theState legislature, within purview of powers as per Entry 21 of List II.Section 2(j) of the Act of 1986 has defined Karnataka State to includethe territorial waters, but that has to be read in the context of Entry 21in List II. The definition in section 2(j) is confined to the regulation offisheries, and cannot be interpreted to mean that the territorial watersbelong to Karnataka. The State cannot claim 12 nautical miles as partof its territory; otherwise, each maritime State can pass laws with anyof the items mentioned in List -I regarding the activities in the territorialwaters, which are the prerogative of the Parliament.

11. Mr. Datar has further submitted that under Entries 56 and57 of List II, the State legislature has the competence to levy tax onthe carriage of goods and passengers only on inland waters base. Byimplication, any taxes on the carriage of goods or passengers in theterritorial waters is outside the legislative competence of the Statelegislature. Entries 25 to 27 of List I indicate that the entire shippingindustry is exclusively within the domain of Parliament. Entry 27 of List-I cover the ports, and the agreement is with the Port Trust. He hasfurther attracted our attention to section 5 of the Territorial Waters Act,1976. Section 5 defines the contiguous zone to be at a distance of 24nautical miles from the nearest point of the base-line. The CentralGovernment has the exclusive power to make laws concerning customsand other fiscal matters on activities that take place in the contiguouszone. The Territorial Waters Act prevails over the State legislaturedealing with sales tax, i.e., the KST Act. Thus, the decision in 20[th]Century Finance Corporation Ltd. v. State of Maharashtra, 2000(6) SCC 12 is not attracted in which this Court was concerned withthe controversy as to which State could levy sales tax, where signingof the contract, delivery of the goods or use of the rights were indifferent States. The majority held that the State where a contract issigned would have the power to levy a sales tax. Thus, the place wherethe goods were delivered or used could not be a ground for levy ofsales tax. Merely signing of the contract in Mangalore conferred nojurisdiction to levy sales-tax on the State of Karnataka. The decisionhas no application to the transaction, the effect of which takes place interritorial waters or the high seas, even if the agreement is signed withina particular State.

12. Mr. Mohan Parasaran, learned senior counsel has taken usin detail to various clauses of the agreement. The agreement is in the AB

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Anature of a time charter as approved by the New York ProduceExchange (NYPE), which is the standard form for time charters. It isneither a bareboat cum demise charter nor a voyage charter and is,therefore, only a time charter because of terms and conditions. He hasrelied upon BSNL v. Union of India, (2006) 3 SCC 1 wherein this Courthas laid down essential attributes of a transaction to constitute a transferBof the right to use the goods. At no point of time, the vessel should goout of the possession or control of the company, therefore the essentialingredient to constitute it a transfer of the right to use is missing. Hehas also referred to DLF Universal Ltd. v. Director, Town andCountry Planning Department, Haryana, (2010) 14 SCC 1. The veryClanguage of the agreement makes it clear to be a contract of service.The expressions like delivery and re-delivery are not to be understoodin a literal sense. There are certain obligations upon the company, whichmakes out that effective control over the vessel is with the company.He had also referred to Harbour Craft Rules. The tug is alwaysoperated, controlled, run, maintained, and insured by the company.DPossession of the Tug remains with it. In the event the tug is disabledfrom use, the charterer is not required to pay charter-party charges tothe company. The company has to indemnify the charterer.

13. Mr. Mohan Parasaran, learned senior counsel has alsosubmitted that the concept of time charter-party is a charter for aEspecified period rather than for a specific task. There are other typesof Charter Party Agreements like demise charter and voyage charter.Under a demise charter, the owner leases his ship to the charterer foran agreed period in exchange for periodic payments. In voyage charter,the owners agree that their ship officered, crewed and bunkered byFthem, shall carry specified cargo on an agreed voyage in exchange forfreight, characteristically a “single payment.” Under Mercantilejurisprudence, it is well-settled that insofar as time charter is concerned,it is only a service contract. He has also referred to Scrutton onCharterparties and Bill of Lading, and British Shipping Laws, Carriage by Sea book by Colinvaux, Raoul P. He has also referred toGa decision in British India Steam Navigation Co. Ltd. v.Shanmughavilas Cashew Industries & Ors., (1990) 3 SCC 481 andother decisions and the definition of time charter-party in Black’s LawDictionary. For the period during which the transferee has such legalright, it has to be to the exclusion of the transferor company, which isHexplicitly necessary to constitute a transfer of the right to use, which is not merely a licence to use the goods. Service tax is already leviabletreating it as service agreement as such sales-tax cannot be exactedby the State Government. The territorial waters are within the exclusivejurisdiction of the Union of India. In view of Article 297 of theConstitution, the State of Karnataka has no jurisdiction to impose a salestax. The territorial waters are deemed Union territory. The sovereigntyof India extends and has always extended to the territorial waters andthe seabed and subsoil underlying and air space over, such waters andit is the Central Government which has the power to alter the limits ofthe territorial waters.

14. Mr. Devadatt Kamat, learned senior counsel submitted onbehalf of the State of Karnataka that the transfer of right to use occurswhen the agreement has been entered into and not when the deliveryof the goods takes place. He has referred to various clauses of theagreement to take home the aforesaid submission and has relied upon20[th] Century Finance Corporation Ltd. v. State of Maharashtra(supra), a decision of the Constitution Bench of this Court which hasbeen approved in BSNL (supra). He has further urged that a coastalState has jurisdiction to levy sales-tax in the territorial waters abuttingthe coast. He has also referred to Article 297. He has relied upon Dr.Ambedkar’s speech in the Constituent Assembly that “State laws willprevail over that area, whatever law you make will have its operationover the area of three miles from the physical territory” and has alsoreferred to H.M. Seervai’s seminal work on the “Constitutional Lawof India” with respect to interpretation of Article 297 of the Constitutionof India. Though the Article has been amended on more than oneoccasion, the Parliament has not altered the basic premise of Article297. He has relied upon Baliram Waman Hiray v. Justice B. Lentin,(1988) 4 SCC 419; P.T. Rajan v. T.P.M. Sahir (2003) 8 SCC 498.Several States, including the State of Karnataka, have enacted the lawswith respect to fisheries. He has referred to section 2(j) of theKarnataka Marine Fishing (Regulation) Act, 1986. There was a transferof right to use the vessel as apparent from the various clauses of theagreement. He has also relied upon Article 366 and the debates relatingto it. Parliament has chosen not to place any restriction on the powerof the State Government under Article 366(29A)(d).

15. Mr. Tushar Mehta, learned Solicitor General of India hasexpressed the concern of the Union of India with respect to territorialwaters and has submitted that the territorial waters vested in the Union A

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Aof India as per Entries 25 to 27 and 30 of List I and the TerritorialWaters Act. The decision of the Karnataka High Court to the extentof territorial waters, cannot be said to be correct. He has relied uponthe debates in the Constituent Assembly as to Article 297. In accordancewith Article 297(3), the Parliament has enacted the Territorial WatersAct, 1976; he has referred to sections 3, 5, and 7 of the said Act. HeBhas also relied on Articles 246 and 286 of the Constitution of India.

16. Following questions arise for consideration in the matter:

(i) Whether the State of Karnataka has jurisdiction to levysales-tax under section 5C of the KST Act in respectCof the Charter Party Agreement dated 8.1.1998?

(ii) Whether the agreement dated 8.1.1998 constitutes“transfer of the right to use”?

(iii) Whether the State of Karnataka has the competenceto levy sales-tax on the agreement, which is effectiveDwithin the territorial waters?

17. This Court issued notice to various coastal States, and theyhave filed response also with respect to territorial waters, such as theStates of Goa, Maharashtra, Kerala, Tamil Nadu, Andhra Pradesh, andWest Bengal, etc.E

In Re: Section 5C of KST Act:

18. The State of Karnataka has sought to levy tax under section5C of the KST Act on charter-party on the ground that it is a transferof right to use vessel.

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19. Section 5C of the KST Act reads:

“Section 5C - Levy of tax on the transfer of the right to use anygoods- Notwithstanding anything contained in sub-section (1) or sub-Gsection (3) of section 5, but subject to sub-sections (4), (5) and(6) of the said section, every dealer shall pay for each year atax under this Act on his taxable turnover in respect of the transferof the right to use any goods mentioned in column (2) of theSeventh Schedule for any purpose (whether or not for a specifiedperiod) at the rates specified in the corresponding entries inHcolumn (3) of the said Schedule.”

20. Section 2(t) of the KST Act defines “sale” and reads as under:

A

“Section 2(t) “sale” with all its grammatical variations and cognateexpressions means every transfer of the property in goods (otherthan by way of a mortgage, hypothecation, charge or pledge)]by one person to another in the course of trade or business forcash or for deferred payment or other valuable consideration,and includes,—

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(i) a transfer otherwise than in pursuance of a contract ofproperty in any goods for cash, deferred payment orother valuable consideration; C

(ii) a transfer of property in goods (whether as goods or insome other form) involved in the execution of a workscontract;

(iii) a delivery of goods on hire purchase or any system ofpayment by installments.

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(iv) a transfer of the right to use any goods for any purpose(whether or not for a specified period) for cash, deferredpayment or other valuable consideration;——

Explanation 1.—x x x

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Explanation 2.— x x x

Explanation 3.— (a) The sale or purchase of goods (other thanin the course of inter-State trade or commerce or in the courseof import or export) shall be deemed, for the purposes of thisAct, to have taken place in the State wherever the contract ofsale or purchase might have been made, if the goods are withinthe State.

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(i) n the case of specific or ascertained goods, at the timethe contract of sale or purchase is made; and

(ii) in the case of unascertained or future goods, at the timeGof their appropriation to the contract of sale or purchaseby the seller or by the purchaser, whether the assent ofthe other party is prior or subsequent to suchappropriation.

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3(b) x x x

A3(c) x x x

3(d) x x x”

21. A reading of the definition of sale makes it crystal clear thatevery transfer of property in goods by one person to another in thecourse of trade or business, includes the transfer of right to use anyBgoods for any purpose. Section 5C of the Act also provides levy of taxon the transfer of the right to use any goods. Article 366(29A)(d)inserted by the Constitution (46[th] Amendment) Act, 1982 on 2.2.1983reads:

“366. (29) “tax on income” includes a tax in the nature of anCexcess profits tax; (29A)“tax on the sale or purchase of goods” includes—

(a) a tax on the transfer, otherwise than in pursuance of acontract, of property in any goods for cash, deferredDpayment or other valuable consideration; (b) a tax on the transfer of property in goods (whether asgoods or in some other form) involved in the executionof a works contract;

(c) a tax on the delivery of goods on hire purchase or anyEsystem of payment by instalments; (d) a tax on the transfer of the right to use any goods forany purpose (whether or not for a specified period) forcash, deferred payment or other valuable consideration; (e) a tax on the supply of goods by any unincorporatedassociation or body of persons to a member thereof forcash, deferred payment or other valuable consideration; F

(f) a tax on the supply, by way of or as part of any serviceor in any other manner whatsoever, of goods, being foodor any other article for human consumption or any drink(whether or not intoxicating), where such supply orservice, is for cash, deferred payment or other valuableconsideration, G

and such transfer, delivery or supply of any goods shall be deemedto be a sale of those goods by the person making the transfer, H

delivery or supply and a purchase of those goods by the personto whom such transfer, delivery or supply is made;”

(emphasis supplied)

22. A tax on the sale or purchase of goods includes a tax fortransfer of right to use goods as that is deemed to be a sale. The questionthat arises for consideration is whether there is a transfer of the rightto use the vessel. It has to be considered in view of the charteragreement entered into between the company and the Port Trust. Thetender documents pursuant to which agreement has been entered intocontains the conditions and instructions to tenderers. The pre-qualification criteria provide that the tenderer has to submit thedocuments regarding ownership or possession of tug on bareboat/committed demise charter hire of tugs. In case he does not own thetug, he has to provide documents to prove that he has entered into alease for charter hire of tug(s) for deploying them in the Port Trustduring the period of the contract. The tenderer should have experienceof manning and harbor practice for one year during the last 3 years.Tugs should be deployed at harbors at New Mangalore Port during thecontract period.

23. General conditions of the contract are also specified in thetender documents. Paras 5(a), 6(ii) of the instructions to tenderers areextracted hereunder:

“5. PRE-QUALIFICATION CRITERIA:

Tenderers must fulfill the following pre-qualification criteria toprove the techno-commercial competence and submit thedocuments in support thereof:

a) Tenderer should either own OR should be in possession oftug on bareboat/committed demise charter hire or Tug(s). In casethe tenderer is not owning the tug(s), he should submit the validdocuments to prove that he has entered into a lease for charterhire of tug(s) for deploying them in NMPT during the period ofthe contract.”

6. SUBMISSION OF TENDERS:

(a) ENVELOPE ‘A’ : The first Envelope shall be clearly markedas ‘ENVELOPE NO.A.’ It shall contain the following documentsand information.

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A(i) x x x

(ii) Proof of ownership of Tug/Tugs of having entered intoa bareboat committed demise charter agreement andother documents to be submitted, in accordance withClause 5(a).”

B

24. Instructions at paras 5, 6, 13 and 15 of General Conditionsof Contract are as under:

“5. PAYMENT OF TAXES:

The contractor shall pay all taxes, duties, etc. which he may beCliable to pay to State Government or Government of India or anyother authority under any law for the time being in force inrespect of or in accordance with the execution of a contract.The contractor shall further be liable to pay such an increase intax, levy, duty, etc. under existing law or which may be leviableas a result of introduction of any laws, increase in taxes, levy,Dduty etc. or imposition of new taxes levy, duty etc.

6. INDEMNITY:

Notwithstanding that all reasonable and proper precautions mayhave been taken by the Contractor at all times during the currencyEof the agreement, the Contractor shall nevertheless be whollyresponsible for all damages to the property of Charterers duringthe currency of the agreement.”

“13. NOTIFICATION OF AWARD:

(a) x x x

F

(b) The Letter of Acceptance will be issued in the name ofthe company which has purchased/submitted the tender.

(c) The time to count for delivery of tug shall commencefrom the date of issue of the Letter of Acceptance.”

G“15. PERFORMANCE GUARANTEE:

The successful tenderer shall furnish a bank guarantee from anationalized bank having its branch at Panambur/Mangalore, alongwith the Charter Party Agreement, for compliance with thecontract terms and conditions, for an amount equivalent to 10%Hof average annual contract value. This guarantee shall be valid THE GREAT EASTERN SHIPPING CO. LTD. v.STATE OF KARNATAKA & ORS. [ARUN MISHRA, J.]

for a total period of 9 months from the date of commencementof service.”

25. Clauses 1 and 3 to 15 of the Special Conditions which arerelevant are extracted hereunder:

Special Conditions of Contract :

1. All operational costs, including wages (Minimum WagesAct or any other Act, allowances, victualing, Insurance(Personal), Hull and Machinery, Protection & Indemnity)will be borne by the Contractor. Repairs, survey, andother requirements to keep the tug operational will beto the Contractor’s account and during any absence ofthe tug from duty or inability of tug to perform for theseor any other reasons, will result in non payment of hirecharges, for the period the Tug was not made availableto the Charterer, on pro-rata basis and clause 16 of theCharter Party Agreement shall apply.

2. xxxxxxx

3. On the date of commencement of the service, the tugshall have completed all the necessary surveys and bein possession of all valid certificates. Drydocking shouldnot be required for a minimum period of two years fromthe date of delivery of Tug on charter.

4. A joint survey will be carried out at NMPT before thetug is accepted for service in the port to assess thecondition, capability, and performance of the Tug andthe quantity of fuel, lubricants, etc.

5. On-hire and off-hire survey charges shall be borneequally by the Charterer and the Contractors.

6. The Charterer will not be responsible for any damagesuffered by the tug due to failure of the tug or errorsof the Tug Master and crew or any reason whatsoever.

7. The contract will be for a period of 6 months with effectfrom the date of commencement of the service. Thecontract may be extendable for a further period of oneyear at the discretion and option of NMPT. The A

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Charterer may exercise the option for an extension notlater than 30 days prior to the expiry of the first oneyear period.

8. The Tug shall be made available for port operationsround the clock (24 hours a day) throughout the contractperiod.

9. The Contractor shall comply with the Indian MerchantShipping Act and any other legislation related to theoperation of a tug in Indian territorial waters, and if offoreign registry, shall obtain the appropriate licenses/permission from the Directorate General of Shipping,Mumbai for operating the tug in NMPT.

10. The Contractor has to pay the revised minimum wagesto the crew engaged by them. If the crew is engagedfor more than 8 hours, they should be compensated forthe extra work. The contractor has to take the insurancepolicy covering all types of risks of all employeesengaged by them.

11. The Contractor shall carry out the works strictly inaccordance with the contract to the satisfaction of theDeputy Conservator and shall comply with and adherestrictly to his instructions and direction on any matter(whether mentioned in the contract or not).

12. The tug shall be delivered within 30 days from the dateof issue of the Letter of Acceptance, in seaworthy andefficient condition, and should be in possession of allnecessary certificates.

13. If the contractor fails to deliver the tug in all respectswithin 30 days, from the date of issue of Letter ofAcceptance, liquidated damages at the rate of Rs.30,000/- per day will be levied on the Contractor, and ifthe Tug is not delivered for operation within 60 days fromthe date of issue of Letter of Acceptance, the contractshall be canceled and EMD forfeited.

14. The Contractor shall obtain necessary clearance, asrequired from D.G.Shipping, Ministry of Surface Transport, etc. for deploying the tug for service in theAport before the tug is put into the service.

15. The steady/sustained Bollard pull of the Tug should notbe less than 40 tonnes at the time of delivery. BollardPull test certificate should be from Classification societyand should not be more than 6 months old from the dateof delivery of the Tug to NMPT.”

B

26. The relevant clauses of agreement viz., clauses 1, 3, 4, 5, 7,10, 11, 12, 13, 14, 14 (a), 15, 16, 17, 21 & 22 read thus:

“ANNEXURE – I

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CHARTER PARTY AGREEMENT

x x x

NOW THIS AGREEMENT WITNESSETH.

1. The Contractors let and the Charterer hire the good Vessel…………….. for a period of six months with effect fromcommencement of service. (Not a Sunday or a legal holidayunless taken over) the Vessel is delivered and placed at thedisposal of the Charterers and the contractor undertakes tomaintain the vessel during the period of this Charter.

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3. The Vessel to be used for various lawful services required byCharterers including towing, docking and undocking of vessel atNew Mangalore Port round the clock (24 hours a day) andthroughout the contract period of six months including but notlimited to:

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a) berthing and unberthing of vessels in port.

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b) To stand by as fire float, Oil spill dispersant sprayingboat, etc.

c) To assist in double banking by way of acting as dockingtug.

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d) To maintain communication by VHF.

e) All other operations required in connection with docking/undocking operations of vessels at Port and related toHarbour conservancy and/or movement of vessels withinthe Port and such other operations as are conventionallyperformed by Ports.

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In the event the tug being unable to perform any of the operations,no hire to be paid by the Charterer to the Contractor and clause16 of the Charter Party Agreement shall apply.

4. CONTRACTORS TO PROVIDE:

Except as otherwise stated in this charter or a: may be agreedfrom time to time the contractors shall provide and/ or pay forall requirements, cost, or expense relating to the vessel, her masterand crew, which, without prejudice to the generality of theforegoing shall include.

B

(a) Drydocking, repairs, docking for the contractor,: Purpose, andCall expenses associated therewith, (b) provisions, wages (as perminimum wages act)etc., shipping and discharging fee; and allother expenses of the Master, Officers and Crew (c)Deck ,cabin and ongoing room stores (d) Adequate No. of Towing ropestested and certified (o) galley fuel, (f) Marine and war riskDinsurance of the vessel (g) fumigation and deratisation exemptioncertificate (h) all customs, or import duties arising in connectionwith any of the foregoing (1) all taxes, duties, and levies includingbut not limited to the taxes, duties, and levies imposed on theincome of the contractor, its employees or any levies, etc. on anypurchase made by the contractors and/or any penalties imposedEby any authorities from time to time.

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5. Charterers to provide whilst the vessel is on hire fuel, lubricants,water, electricity, port charges, and anti-pollutants. In case ofactual fire fighting as ordered by Charterer, the cost of foam/chemicals consumed for the fire fighting will be reimbursed byFthe Charterer at actuals.

6. The Charterers at port of delivery and the Contractors at portof redelivery to take over and pay for all fuel and lubricantsremaining in the vessel at Mangalore.

G7. MAINTENANCE AND OPERATION:

(a) The vessel shall, during the charter period, be for allpurposes at the disposal of the Charterers and under thecontrol in every respect. The Contractor shall maintainVessel, machinery, appurtenances and spare parts in agood state of repair, inefficient operating condition and H

in accordance with good commercial maintenancepractice and they, shall keep the vessel with unexpiredclassification of the class/MMD and with other requiredcertificates in force at all times.

(b) The Charterer shall have the use of all outfits, equipment,and appliances on board at the time of delivery. Thecontractor shall, from time to time during the charterperiod, replace such items of equipment as shall be sodamaged or worn as to be unfit for use. The Contractorshall carry out all repairs or replacement of anydamaged, worn or lost parts or equipment in such manner(both as regards workmanship and quality of materials)as not to diminish the value and efficiency of the vessel.

x x x

10. INSPECTION:

The Charterers shall have the right to require the vessel to bedry-docked if the contractor is not docking vessel at normalclassification/statutory intervals. The fees for such dry dock/inspection and survey shall be borne by the Contractor. All timetaken in respect of dry docking, inspection, survey, or repairs shallnot count as time on hire and shall not form part of the charterperiod, and clause 16 of the Charter Party Agreement shall apply.

11. INSURANCE:

(a) During the Charter period, the vessel shall be keptinsured by the Contractors at their expense againstmarine Hull & Machinery and war risks. The Charterersand/ or Insurers shall not have any right of recovery orsubrogation against the Contractors on account of theloss of any damage to the vessel or her machinery orappurtenances covered by such Insurance or on accountof payments made to discharge claims against orliabilities of the vessel or the Charterers covered by suchinsurance.

(b) During the charter period, the vessel shall be keptinsured by the contractors at their expense againstprotection and indemnity risks in such form as the A

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charterers shall in writing approve which approval shallnot be unreasonably withheld. If the contractors fail toarrange and keep any of the insurances provided forunder the provisions of sub-clause (b) in the mannerdescribed therein, the Charterers shall notify Contractorswhereupon the contractors shall rectify the positionwithin seven running days.

(c) In the event of any act or negligence on the part of thecontractors which may vitiate any claim under theinsurance herein provided, the contractor shall indemnifythe Charterers against all claims and demands whichwould otherwise have been covered by such insurance.

12. The whole reach and burthen of the vessel, including lawfuldeck capacity to be at the Charterers’ disposal, reserving properand sufficient space for the vessel’s master, Officers, Crew,tackles, apparel, furniture, provisions and stores.

13. The vessel should have a set of competent and qualified TugMaster and Crew, as required by statutory regulation.

14. (a) The Master to execute the Charterer’s instructions withthe utmost dispatch and to render customary assistance with thevessel’s crew. The Master to be under the order of the Charterersas regards employment, agency, or other arrangements. TheContractors to indemnify the Charterers against all consequencesor liabilities arising from the Master, Officers, or Agents for theirunlawful actions as well as from any irregularity in the vessel’spapers.

(b) If the Charterers have the reason to be dissatisfied with theconduct or efficiency of the Master, Officer of the crew, theContractors on receiving particulars of the complaint, promptlyinvestigate the matter and, if necessary, shall make a change inthe appointment. However, the Charterers shall have the rightto demand the changes of any Master or other crew, whichdemand shall not be unreasonable.

15. The Charterer or their representatives will give tile Masterall instructions in English and the Master and Engineer to keepfull and correct logs in English, accessible to the Charterers.

16. PENALTY:

(a) If the vessel is inoperative and/or unavailable, and theCharterer are denied use of the vessel, penalty will be leviedfrom the time and date of such in operation/non-availability afterallowing any downtime to the credit of the contractors up to thetime and date of break down/in operation as follows, in additionto non payment of charter hire charges.

From the time and date of such incorporation non—availability,after following any downtime to the credit of the contractor upto the time and date of break down/in operation to 14 days ……………………… 15% of hire charges per day.15 to 21 days …………………… 30% of hire charges per day.Beyond 22 days………………..… 50% of hire charges per day.

In case of non-deployment of the tug beyond 30 days, theContract shall be liable for termination at the discretion of thecharterer, and clause 22 of the Charter Party Agreement shallapply.

(b) If the vessel is required to be dry-docked as required by Class(LRS/any other Classification Society), or for any other reasonwhatsoever, the Contractors will be permitted to dry dock theVessel to maintain her Class with the prior approval of Dy.Conservator, but no hire charges will be paid for that period, andpenalty will be levied as per clause 16(a) above, if applicable.

17. The Contractors shall bear all expenses for mobilization anddemobilization.

x x x x x

21. The Contractors shall be liable for pollution damage and thecost of clean up which has occurred due to the Contractor’s and/or the Contractor’s personnel by willful, wanton, intentional actsor omissions or gross negligence which cause or allow thedischarge, spills or leaks of any pollutants from any sourcewhatsoever.

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A22. PERFORMANCE GUARANTEE:

The Contractors shall furnish to the Charterers, within 30 daysfrom the date of issue of the Letter of Acceptance, for charteringthe vessel, an irrevocable and unconditional Bank Guarantee froma Nationalized Bank for a sum equivalent to 10% of the averageBannual contract value computed for a period of one year charter.This irrevocable Bank Guarantee shall be valid for a total periodof 30 months from the date of commencement of service. In theevent of the Contractors failing to honor any of the commitmentsentered ‘into under this agreement, the Charterers shall have anunconditional option under guarantee to invoke the said BankCGuarantee and to claim the amount from the Bank. The Bankshall be obliged to make payment to the Charterer upon demand.”

27. As per the Charter Party Agreement, Annexure I, the vesselhas been taken by the Port Trust for various lawful services requiredby the chartered Port Trust, including towing, docking, and undockingDat the Port round the clock for the contract period of 6 months. Thecontractor that is the company has to provide the cost or expensesrelated to the vessel, her master and crew, whereas the charterer toprovide fuel, lubricants, water, electricity, port charges, and for anti-pollutants. The provisions for maintenance and operation are alsoEcontained in the agreement. As per clause 7, the vessel shall duringthe charter period be for all purposes at the disposal of the charterersand under their control in every respect, whereas the maintenance partis with the contractor company. The charterer shall have the use of alloutfits, equipment, and appliances on board the vessel at the time ofdelivery. Insurance charges have to be borne by the contractor. TheFvessel shall be kept insured by the contractors at their expense againstprotection and indemnity risks. The whole reach and burthen of thevessel, including the lawful capacity to be kept at the charterer’sdisposal.

28. A performance guarantee has to be furnished by theGcontractor to the charterer to the contract under clause 22.

29. It is apparent that to submit a tender, the tenderer should eitherown or should be in possession of a Tug on bareboat/committed demisecharter hire of Tug(s), and in case he is not the owner, he has to provethat he has entered into a lease for charter hire of tug for deployingHthem at Mangalore Port during the period of the contract. No doubt

about it that as provided in para 6(vii) of the instructions to the tenderersthat the Tugs should be manned appropriately as per the minimumrequirement of the Harbour Craft Rules during the contract period, andthis is the responsibility of the tenderer. As per clause 6 of the GeneralConditions of Contract, the contractor is wholly responsible for alldamages to the property of the charterer during the currency of theagreement. The indemnity clause indemnifies, charterer for any damageto its property; is to be provided by the contractor.

30. Condition 1 of the special conditions states that all operationalcosts, including wages to be borne by the contractor. To keep the tugoperational has to be on the contractor’s account. As per condition 3of the special conditions, the tug shall have completed all the necessarysurveys and be in possession of all valid certificates. A joint survey tobe carried out at the Port Trust before the tug is accepted for servicein the Port to assess the condition. Capability and performance of thevessel and the quantity of fuel, lubricants, etc. On-hire and off-hiresurvey charges shall be borne equally by the charterer and thecontractors as provided in condition 5. The charterer will not beresponsible for any damage suffered by the tug is provided incondition 6.

31. The contract would be for six months and extendable for oneyear at the discretion and option of the Port Trust. The tug shall bemade available for port operations round the clock throughout thecontract period as per condition No.8. The contractor has to complywith the provisions of the Indian Merchant Shipping Act and the lawas to licenses/permissions to operate tug. It is the liability of thecontractor to pay revised minimum wages to its staff. The contractorshall carry out the work strictly to the satisfaction of the DeputyConservator, and the tug shall be delivered within 30 days from the dateof issue of the letter of acceptance.

32. The charter agreement also provides round the clock servicesthroughout the contract period in clause 3 at the disposal of the port.The contractor has to pay the expenses for the master and crew. Asper clause 5, the charterer has to provide whilst the vessel is on hire,fuel, lubricants, water, electricity, port charges, and anti-pollutants. Asper clause 7(a), the vessel shall be for all purposes at the disposal ofthe charterer and under the control of the contractor, and as providedin clause 7(b) of the charter agreement, the charterer shall have the A

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Ause of all outfits, equipment, and appliances. No doubt about it thatinsurance is the liability of the contractor. The indemnification also isthe liability of the contractor under the agreement. The whole reachand burthen of a vessel, including lawful deck capacity, is at the disposalof the charterer, reserving proper and sufficient space for the vessel’smasters, officers, etc. A performance guarantee has also to beBsubmitted.

33. When we peruse the various terms and conditions of theCharter Party Agreement (Annexure I), clause 1 provides that thecontractors “let” and the charterer “hire” the goods vessel for sixmonths. The expression ‘let’ has been used, and the vessel mostCsignificantly during the charter period has been placed at the “disposal”of the charterers and under their control in every respect. Thecharterers have been given the right to use all outfits, equipment, andappliances on board the vessel at the time of the delivery, including thewhole reach, burthen, and deck capacity. Thus, in our considered opinion,Dmerely by providing the staff, insurance, indemnity, and otherresponsibilities of bearing officials costs. Effective control for the entireperiod of six months has been given to the charterers. It is a case oftransfer of right to use the vessel for which certain expenses and staffare to be provided by the contractor, which is not sufficient to makeout that the control and possession of the vehicle are with the contractor.EThe possession and control are clearly with the charterer. As in essence,it has to be seen from a conjoint reading of various conditions whetherthere is a transfer of right to use the vessel. In our considered opinionthere is not even an iota of doubt that under the charter agreementcoupled with the instructions to tenderers, general conditions and specialconditions for the contract as specified in the tender documents andFcharter-party clauses, there is a transfer of right to use the vessel forthe purposes specified in the agreement.

34. To constitute a transaction for the transfer of right to use ofgoods, essential is, goods must be available for delivery. In the instantcase, the vessel was available for delivery and in fact, had beenGdelivered. There is no dispute as to the vessel and the charterer has alegal right to use the goods, and the permission/licence has been madeavailable to the charterer to the exclusion of the contractor. Thus, thereis complete transfer of the right to use. It cannot be said that theagreement and the conditions subject to which it has been made, is notHa transfer of right to use the goods, during the period of six months, the contractor has no right to give the vessel for use to anyone else.Thus in view of the provisions inserted in Article 366(29A)(d), section5C, and definition of ‘sale’ in section 2 of the KST Act, there is noroom for doubt that there is a transfer of right to use the vessel.

35. What constitutes the transfer of right to use tangible propertyhas been dealt with in various decisions. In Bharat Sanchar NigamLtd. & Anr. v. Union of India & Ors., (2006) 3 SCC 1, this Courthas observed thus:

“42. All the sub-clauses of Article 366(29-A) serve to bringtransactions where one or more of the essential ingredients of asale, as defined in the Sale of Goods Act, 1930 are absent withinthe ambit of purchase and sales for levy of sales tax. To thisextent, only is the principle enunciated in State of Madras v.Gannon Dunkerley Ltd. & Co. (Madras) Ltd., AIR 1958 SC560 (sic modified). The amendment especially allows specificcomposite contracts viz. works contracts [sub-clause (b)]; hire-purchase contracts [sub-clause (c)], catering contracts [sub-clause (e)] by legal fiction to be divisible contracts where thesale element could be isolated and be subjected to sales tax.

44. Of all the different kinds of composite transactions, thedrafters of the Forty-sixth Amendment chose three specificsituations, a works contract, a hire-purchase contract, and acatering contract to bring them within the fiction of a deemedsale. Of these three, the first and third involve a kind of serviceand sale at the same time. Apart from these two cases wheresplitting of the service and supply has been constitutionallypermitted in sub-clauses (b) and (f) of clause (29-A) of Article366, there is no other service which has been permitted to be sosplit. For example, the sub-clauses of Article 366(29-A) do notcover hospital services. Therefore, if during the treatment of apatient in a hospital, he or she is given a pill, can the Sales TaxAuthorities tax the transaction as a sale? Doctors, lawyers, andother professionals render service in the course of which can itbe said that there is a sale of goods when a doctor writes outand hands over a prescription or a lawyer drafts a document anddelivers it to his/her client? Strictly speaking, with the paymentof fees, consideration does pass from the patient or client to thedoctor or lawyer for the documents in both cases.

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45. The reason why these services do not involve a sale for thepurposes of Entry 54 of List II is, as we see it, for reasonsultimately attributable to the principles enunciated in GannonDunkerley case, namely, if there is an instrument of contractwhich may be composite in form in any case other than theexceptions in Article 366(29-A), unless the transaction in truthrepresents two distinct and separate contracts and is discernibleas such, then the State would not have the power to separatethe agreement to sell from the agreement to render service, andimpose tax on the sale. The test, therefore, for compositecontracts other than those mentioned in Article 366(29-A)continues to be: Did the parties have in mind or intend separaterights arising out of the sale of goods? If there was no suchintention, there is no sale even if the contract could bedisintegrated. The test for deciding whether a contract falls intoone category or the other is to as what is “the substance of thecontract.” We will, for want of a better phrase, call this thedominant nature test.”

50. What are the “goods” in a sales transaction, therefore,remains primarily a matter of contract and intention. The sellerand such purchaser would have to be ad idem as to the subject-matter of sale or purchase. The court would have to arrive at aconclusion as to what the parties had intended when they enteredinto a particular transaction of sale, as being the subject-matterof sale or purchase. In arriving at a conclusion, the court wouldhave to approach the matter from the point of view of areasonable person of average intelligence.

73. With respect, the decision in 20th Century Finance Corpn.Ltd. v. State of Maharashtra, (2000) 6 SCC 12, cannot be citedas authority for the proposition that delivery of possession of thegoods is not a necessary concomitant for completing a transactionof sale for the purposes of Article 366(29-A)(d) of theConstitution. In that decision, the Court had to determine wherethe taxable event for the purposes of sales tax took place in thecontext of sub-clause (d) of Article 366(29-A). Some States hadlevied a tax on the transfer of the right to use goods on thelocation of goods at the time of their use irrespective of the placewhere the agreement for such transfer of right to use such goodswas made. The other States levied a tax upon delivery of the goods in the State pursuant to agreements of transfer while someother States levied a tax on deemed sales on the premise thatthe agreement for the transfer of the right to use had beenexecuted within that State (vide para 2 of the judgment asreported). This Court upheld the third view, namely, merely thatthe transfer of the right to use took place where the agreementswere executed. In these circumstances, the Court said that: (SCCp. 42, para 28)

“28. No authority of this Court has been shown on behalf of therespondents that there would be no completed transfer of rightto use goods unless the goods are delivered. Thus, the deliveryof goods cannot constitute a basis for the levy of tax on thetransfer of right to use any goods. We are, therefore, of theview that where the goods are in existence, the taxable eventon the transfer of the right to use goods occurs when a contractis executed between the lessor and the lessee and situs of saleof such a deemed sale would be the place where the contract inrespect thereof is executed. Thus, where goods to be transferredare available, and a written contract is executed between theparties, it is at that point situs of taxable event on the transfer ofright to use goods would occur, and situs of sale of such atransaction would be the place where the contract is executed.”

(emphasis ours)

74. In determining the situs of the transfer of the right to usethe goods, the Court did not say that the delivery of the goodswas inessential for the purposes of completing the transfer ofthe right to use. The emphasized portions in the quoted passageevidences that the goods must be available when the transfer ofthe right to use the goods takes place. The Court also recognizedthat for oral contracts, the situs of the transfer might be wherethe goods are delivered (see para 26 of the judgment).

75. In our opinion, the essence of the right under Article 366(29-A)(d) is that it relates to user of goods. It may be that the actualdelivery of the goods is not necessary for effecting the transferof the right to use the goods, but the goods must be available atthe time of transfer, must be deliverable and delivered at somestage. It is assumed, at the time of execution of any agreementto transfer the right to use, that the goods are available and ABC

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Adeliverable. If the goods, or what is claimed to be goods by therespondents, are not deliverable at all by the service providersto the subscribers, the question of the right to use those goods,would not arise.”

36. In a concurring opinion, Dr. A R Lakshmanan, J. in BSNLB(supra) observed:

“97. To constitute a transaction for the transfer of the right touse the goods, the transaction must have the following attributes:

(a) there must be goods available for delivery; (b) there must be a consensus ad idem as to the identity ofthe goods; C

(c) the transferee should have a legal right to use thegoods—consequently, all legal consequences of such useincluding any permissions or licenses required thereforshould be available to the transferee;D

(d) for the period during which the transferee has such legalright, it has to be the exclusion to the transferor—thisis the necessary concomitant of the plain language ofthe statute viz. a “transfer of the right to use” and notmerely a license to use the goods;E

(e) having transferred the right to use the goods during theperiod for which it is to be transferred, the owner cannotagain transfer the same rights to others.”

37. The Charter Party Agreement qualifies the test laid down

Fby this Court. Applying the substance of the contract and the nominalnature test, the vessel was available when the agreement for the rightto use the goods has taken place. The vessel was available at the timeof transfer, deliverable, and delivered and was at the exclusive disposalfor six months round the clock with the charterer port trust. The useof license and permission was at the disposal of the charterer and toGthe exclusion of the contractor/transferor. It was not open to thecontractor to permit the use of the vessel by any other person for anyother purpose.

38. In DLF Universal Ltd. & Anr. v. Director, Town, andCountry Planning Department, Haryana & Ors., (2010) 14 SCC 1Hhas been relied upon for interpretation of the contract thus:

“12. The agreement with the Governor required to be enteredinto by the owners of the land intending to set up a colony isstructured and regulated by Rule 11 of the Rules. The terms andconditions of the agreement and the obligations of the owner ofthe land and the covenants thereof are prescribed by statutoryrules. The contract between the owner of the land and its buyers,unlike the agreement entered by the owner of the land with theGovernment, is not required to be in any statutory form. It is acontract between the two willing contracting parties whereunderthe terms and conditions are mutually agreed upon. The covenantsdecide the mutual obligations between the owner of the land andthe buyers thereof.

Interpretation of contract

13. It is a settled principle in law that a contract is interpretedaccording to its purpose. The purpose of a contract is theinterests, objectives, values, policy that the contract is designedto actualize. It comprises the joint intent of the parties. Everysuch contract expresses the autonomy of the contractual parties’private will. It creates reasonable, legally protected expectationsbetween the parties and reliance on its results. Consistent withthe character of purposive interpretation, the court is required todetermine the ultimate purpose of a contract primarily by the jointintent of the parties at the time the contract so formed. It is notthe intent of a single party; it is the joint intent of both the partiesand the joint intent of the parties is to be discovered from theentirety of the contract and the circumstances surrounding itsformation.

14. As is stated in Anson’s Law of Contract:

“a basic principle of the common law of contract is that the partiesare free to determine for themselves what primary obligationsthey will accept…. Today, the position is seen in a different light.Freedom of contract is generally regarded as a reasonable, social,ideal only to the extent that equality of bargaining power betweenthe contracting parties can be assumed, and no injury is done tothe interests of the community at large.”

There is no dispute with the proposition that the terms andconditions have to be seen as intended by parties, and it has to be based AB

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Aon the objectives, values, and policies that contract is designed toactualize.

39. Reliance has also been placed on the State of A.P. & Anr.v. Rashtriya Ispat Nigam Ltd., (2002) 3 SCC 314 thus:

“3. The respondent is owning Visakhapatnam Steel Project. ForBthe purpose of the steel project, it allotted different works tocontractors. The respondent undertook to supply sophisticatedmachinery to the contractors for the purpose of being used inthe execution of the contracted works and received charges forthe same. The appellant made a provisional assessment levyingCa tax on hire charges under Section 5-E of the Act. Therespondent filed a writ petition seeking a declaration that the taxlevied, exercising power under Section 5-E of the Act on the hirecharges collected during the period 1988-89, was illegal andunconstitutional. The appellant filed a counter-affidavit in the writpetition contending that the respondent was lending highlyDsophisticated and valuable imported machinery to the contractorsengaged in the execution of the project work on specified hirecharges; the machinery was given in possession of the contractorand he was responsible for any loss or damage to it and in viewof the terms and conditions contained in the agreement, thereEwas transfer of property in goods for use and on the amountscollected by the respondent as charges for lending machineryattracted tax liability under Section 5-E of the Act.

4. The High Court after scrutiny and close examination of theclauses contained in the agreement and looking to the agreementFas a whole, in order to determine the nature of the transaction,concluded that the transactions between the respondent andcontractors did not involve transfer of right to use the machineryin favour of the contractors and in the absence of satisfying theessential requirement of Section 5-E of the Act, i.e., transfer ofright to use machinery, the hire charges collected by theGrespondent from the contractors were not exigible to sales tax.On a careful reading and analysis of the various clauses containedin the agreement and, in particular, looking to clauses 1, 5, 7, 13,and 14, it becomes clear that the transaction did not involve atransfer of right to use the machinery in favor of contractors.HThe High Court was right in arriving at such a conclusion. In H

the impugned order, it is stated, and rightly so in our opinion, thatthe effective control of the machinery even while the machinerywas in use of the contractor was that of the respondentCompany; the contractor was not free to make use of themachinery for the works other than the project work of therespondent or move it out during the period the machinery wasin his use; the condition that the contractor would be responsiblefor the custody of the machinery while it was on the site did notmilitate against the respondent’s possession and control of themachinery. It may also be noticed that even the Appellate DeputyCommissioner, Kakinada, in the order dated 15-11-1999 in regardto Assessment Years 1986-87 and 1987-88, held that under theterms and conditions of the agreement, there was no transfer ofright to use the machinery in favor of the contractor. Although itcannot be said that the appellant was estopped from contendingotherwise in regard to Assessment Year 1988-89, it is anadditional factor and circumstance, which supports the stand ofthe respondent.”

It was a case of transfer of right to use the machinery. The HighCourt held that there was no transfer of right to use the machinery. Inthe absence of satisfying the essential requirement of section 5-E ofthe Andhra Pradesh General Sales Tax Act, 1957. What distinguishesthe aforesaid case on facts is that the effective control of the machineryeven while it was in use of the contractor, was that of the respondentcompany; the contractor was not free to make use of the machineryfor the works other than the project work of the respondent or move itout during the period the machinery was in his use; the condition thatthe contractor was responsible for the custody of the machinery, didnot militate against the company’s possession and control. It was a caseof hiring of the machinery for a specific purpose on specified hirecharges. The Charter Party Agreement is different in the present case.

40. Reliance has been placed on British India Steam NavigationCo. Ltd. v. Shanmughavilas Cashew Industries & Ors., (1990) 3 SCC481 thus:

“47. Whether a charterparty operates as a demise or not dependson the stipulations of the charterparty. The principal test iswhether the master is the employee of the owner or thecharterer. In other words, whether the master becomes the ABC

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Aemployee of the charterer or continues to be the owner’semployee. Where the charterparty is by way of demise, thecharterer may employ ship in carrying either his goods or thoseof others. Where the charterparty does not operate as a demise,the charterer’s right vis-a-vis the owner depends upon the termsof the contract. “The contract of carriage is personal to theBcharterer, and he cannot call upon the shipowner to undertakeliabilities to third persons or transfer to third persons his liabilitiesto the shipowner unless the contract so provides.” A charterpartyhas to be construed so as to give effect, as far as possible, tothe intention of the parties as expressed in the written contract.CThe stipulations of charterparty may be incorporated in a bill oflading so that they are thereby binding on the parties. It is anaccepted principle that when stipulations of the charterparty areexpressly incorporated, they become terms of the contractcontained in the bill of lading, and they can be enforced by orDagainst the shipper, consignee or endorsee. The effect of a billof lading depends upon the circumstances of the particular case,of which the most important is the position of the shipper and ofthe holder. Where there is a bill of lading relating to the goods,the terms of the contract on which the goods are carried areprima facie to be ascertained from the bill of lading. However,Eif a shipper chose to receive a bill of lading in a specific formwithout protest, he should ordinarily be bound by it. Thus, itcannot be said that the bill of lading is not conclusive evidenceof its terms and the persons executing it is not necessarily boundby all its stipulations, unless he repudiates them on the groundsFthat, as he did not know, and could not reasonably be expectedto know, of their existence, his assent to them is not to be inferredfrom his acceptance of the bill of lading without objection. Wherethere is a charterparty, the bill of lading is prima facie, as betweenthe shipowner and an endorsee, the contract on which the goodsare carried. This is so when the endorsee is ignorant of the termsGof the charterparty, and maybe so even if he knows of them. Asbetween the shipowner and the charterer, the bill of lading may,in some cases, have the effect of modifying the contract ascontained in the charterparty, although, in general, thecharterparty will prevail and the bill of lading will operate solelyHas an acknowledgment of receipt.

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50. There is nothing to show that the charterparty was by wayof demise. Pacta dant legem contractui — the stipulations ofparties constitute the law of the contract. Agreements give thelaw to the contract. Clause 4, having been a stipulation in thecontract evidenced by the bills of lading the parties, could notresile therefrom. It is not clear whether the English Carriage ofGoods by Sea Act, 1924, or the Indian Carriage of Goods by SeaAct, 1925, was applied by the High Court. The articles and therules referred to are to be found in the Schedule to the IndianAct the Rules whereunder were not applicable to the facts ofthe case. The dispute could not have been decided partlyaccording to municipal law and partly according to English law.The English law was not proved before the court, according tolaw.”

It has been observed by this Court in British India SteamNavigation Co. Ltd. (supra) that whether a charter-party agreementoperates as a demise or not, depends upon the stipulations of the charter-party. In the case of demise, the charterer may employ ship in carryingeither his own goods or those of others. A charter-party has to beconstrued to give effect, as far as possible, to the intention of partiesas expressed in a written contract. When stipulations of the charter-party are expressly incorporated, they become terms of the contract.There was nothing to show that the Charter Party Agreement was byway of demise. Maxim “Pacta dant legem contractui” has been reliedupon, which means that the stipulations of the parties constitute the lawof the contract. The case was remitted for trial. The decision in BritishIndia (supra) lays down whether a charter-party should operate as ademise or not, depends on the stipulations of the charter-party. Basedon stipulations, we have come to the conclusion that it is a case of‘transfer of right to use,’ which is a deemed sale. The decisionbuttresses our conclusion that the charter-party has to be decided basedon the stipulations.

41. In the Union of India v. Gosalia Shipping (Pvt.) Ltd.,(1978) 3 SCC 23 question of charter-party arose, the terms of whichindicated that the charterers agreed to pay the owners for use and hireof the ship and not on account of carriage of goods. It was held that itwas not governed by section 172 of the Income Tax Act, 1961, becausethe section creates a tax liability in respect of occasional shipping.However, what is important is that this Court has considered the charter- ABC

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Aparty and observed that all charter parties are not contracts of carriage.Sometimes ship itself and control over her working and navigation aretransferred, for the time being to persons who use her. In such a case,the contract is very much of letting the ship. This Court has observedthus:

B “10. The weakness of the argument advanced by the appellant’sCounsel consists in its assumption that the charter-party has tobe an agreement for the carriage of something like goods,passengers, livestock, or mail. A contract by charter-party, saysB.C. Mitra in his Law of Carriage by Sea, Tagore Law Lectures1972, “is a contract by which an entire ship or some principalCpart thereof is let to a merchant who is called the charterer, for the conveyance of goods on a determined voyage to one or moreplaces, or until the expiration of a specified period; in the formercase it is called a ‘voyage charterparty’ and in the latter a ‘timecharterparty’. A time charter, according to the author, is “one inDwhich the ownership and also possession of the ship remains with

the original owner and whose remuneration of hire is generallycalculated at a monthly rate on the tonnage of the ship. While avoyage charter is a contract to carry specified goods on a definedvoyage on remuneration or freight usually calculated accordingto the quantity of cargo carried,”. In Carver’s Carriage by Sea,EEleventh Ed., 1963, p. 263, it is stated that “all charter-partiesare not contracts of carriage. Sometimes the ship itself and thecontrol over her working and navigation are transferred for thetime being to the persons who use her. In such cases the contractis really one of letting the ship, and, subject to the express termsFof the charterparty, the liabilities of the shipowner and thecharterer to one another are to be determined by the law whichrelates to the hiring of chattels, and not by reference to theliabilities of carriers and shippers”. According to Scrutton onCharter-parties, Seventeenth Ed., 1964, p.4, charter-parties fallinto three main categories: (i) charters by demise, (ii) timeGcharters (not by way of demise), and (ii) voyage charters.“Sometimes categories (i) and (ii) are both referred to as timecharters as distinguished from category (iii), and they have thisin common that the ship owner’s remuneration is reckoned bythe time during which the charterer is entitled to the use ofHservices of his ship.” The contract in the instant case is of the nature of time charter-party, whether there is a demise of theship or not being immaterial. Clause 4 of the charter-partyprovides for the payment by the charterers “for the use and hire”of the vessel at the rate of U.S. 4.50 dollars per ton on vessel’stotal deadweight carrying capacity, per calendar month,commencing on and from the date of delivery of the ship, “hireto continue until the hour of the day of her re-delivery”. Theseclauses of the charterparty shows that the Aluminium Companytook the ship from its owners on a time charterparty, that theowners were entitled to payment for the use and hire of the ship,that the amount was payable irrespective of what use the shipwas put to by the time charterers or indeed, whether it was putto any use at all and that no part of the payment can be said tohave been made on account of the carriage of goods. Similescan be misleading, but if a hall is hired for a marriage, the chargespayable to the owner of the place are for the use and hire ofthe place, not on account of marriage.”

42. The decision of the High Court of Madras in State of TamilNadu & Ors. v. Tvl. Essar Shipping Ltd. & Ors., (2012) 47 VST209 (Mad.) has been referred to on behalf of the appellants. The HighCourt of Madras has observed that whether the charter-party is avoyage charter-party or time charter-party or charter by demise or not,depends upon the intention of the parties. It has been observed thatcertain words in the charter-party are used in the standard forms ofthe time charter, such as ‘let,’ ‘hire,’ ‘delivery,’ and ‘redelivery,’ thereis no hiring in the real sense. The High Court observed:

“55. In the light of the various clauses evidencing the nature oftransaction as one of rendering of service only, we have nohesitation in accepting the plea of the assessee that the use ofthe terms ‘let’, ‘hire’, ‘delivery’ and ‘redelivery’ are not to beunderstood in the literal sense of giving effective control andpossession to the charterer. On the other hand, the same arereferable to the time when the charter begins and ends. Even ifthe charterers have the right to direct the course that the Vesselwill take so long as the Master and the crew remain the servantsof the owner and the parties have understood that there is nodemise of the ship in favour of the charterer, we do not findany legal ground to sustain the assessment.

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A59. We have no hesitation in accepting the plea of the assesseethat the Tribunal committed a serious error in its understandingof what possession would mean, in the face of the time charteragreement. Going by the decision of the Apex Court reportedin (1990) 3 SCC 481 British India Steam Navigation Co. Ltd.v. Shanmughavilas Cashew Industries and Ors. and the wellBlaid down principles on the concept of time charterpartyagreement, we hold that the essence of the agreement betweenthe assessee and M/s. Poompuhar Shipping Corporation is oneof services; hence, not amenable under the provisions of Section3A of the Act.”

C

In the abovesaid decision, reliance has been placed on the caseof ‘The Hill Harmony’ reported in (2001) 1 LR 147 at page 156. Whenthe ship can be arrested, was also discussed. It was observed that therelationship of an agency is to be established between the owner andthe charterer. The question was of recovery of the amount due andDpayable by the charterer. Following discussion has been made:

“36. Dealing with the nature of rights that a charterer has overthe Vessel under a time charter, in the decision reported in (1978)3 SCC 23 Union of India vs. Gosalia Shipping (Pvt.) Ltd., theSupreme Court quoted from ‘Law of Carriage by Sea’ by B.C.EMitra, that ‘a time charter is one in which the ownership andalso possession of the ship remain in the original owner, whoseremuneration or hire is generally calculated at a monthly rate onthe tonnage of the ship, while a voyage charter is a contract tocarry specified goods on a defined voyage on a remuneration orfreight usually calculated according to the quantity of cargoFcarried.’ Thus the consistent view of the Courts in India andelsewhere is that under the time charter, the owners provideservices for the charterer with their ship, their officers, and thecrew for an agreed period of time. In the decision reported in2001 (1) LR 147 @ page 156 in the case of The Hill Harmony,GLord Hobhouse said, the owner who time charters his ship,transfers to the time charterer in return for payment of hire, ‘theright to exploit the earning capacity of the vessel.’ It was pointedout that despite the fact that certain keywords are used in moststandard forms of the time charter such as ‘let’, ‘hire,’ ‘delivery’and ‘redelivery,’ there is no hiring in the true sense’ (Refer: TheHLondon Explorer 1971 (1) LR 523). Keeping in line with the well

established and well-understood characteristic features on timecharter, in the decision reported in 99 L.W. 517 TransworldShipping Services (I) (P) Ltd. Vs. Owners & Other, this Courtheld that in respect of an interim prayer made for arrest of theship, for the alleged amount due and payable by the charterer tohis agent, neither the legal ownership nor the beneficial ownershipor equitable ownership was in the hands of the charterer in thecase of time charter agreement. Thus this Court viewed that forthe amount due and payable by the charterer, unless therelationship of agency had been established between the ownerand the charterer, the question of arrest of the ship did not arise.Time charterparty not being the demise of the ship but a contractfor hire of services, thus viewed as not resulting in givingpossession to the charterer to result in delivery or redelivery asis normally understood or to be literally construed as though onthe delivery of the Vessel, the owner lost control to resume thesame on the expiry of the period of time charter. Courts havealso viewed that ‘delivery’ and ‘redelivery’ are not apt words toexpress the obligations of either party to the other under thecontract. So long as the contract does not go as a charter bydemise, when the owner gives the services through the ship alongwith her captain and the crew to transport cargo to the directionsof the charterer for a specific period on certain terms, the onlyredelivery possible is to make such arrangements as would enablethe owner to put the ship for his own convenience. Nevertheless,throughout the service extended, the Master and crew remainthe servants of the owner, to represent his interest in the Vessel.Thus the word ‘delivery’ normally understood in a time charterparty denotes the charterer giving directions to the course thatthe ship will take to determine the voyage. In the decision reportedin 1991 (1) LLR 100 @ 107 (The ‘Peonia’), referring to thedecision reported in 1975 (1) LLR 422, the English Court pointedout ‘references to ‘delivery’ and ‘redelivery’ are strictlyinaccurate, since, the vessel never leaves the possession of theshipowner, but the expressions are conventionally used to describethe time when the period of the charter begins and ends (TheBerge Tasta, (1975) 1 LR. 422 at p. 424).”

43. We are not turning our decision upon the terms used like ‘let’,‘hire’, ‘delivery’ and ‘re-delivery’ but on the other essential terms of ABC

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Athe Charter Party Agreement entered in the instant case which clearlymakes out that there is a transfer of exclusive right to use the vesselwhich is a deemed sale and is liable to tax under the KST Act. In theinstant case, full control of the vessel had been given to the chartererto use exclusively for six months, and delivery had also been made.The use by charterer exclusively for six months makes it out that it isBdefinitely a contract of transfer of right to use the vessel with whichwe are concerned in the instant matter, and that is a deemed sale asspecified in Article 366(29A)(d). On the basis of the abovementioneddecision, it was urged that all Charter Party Agreements are serviceagreements. The submission cannot be accepted, as there is no general/Cinvariable rule/law in this regard. It depends upon the terms andconditions of the charter-party when it is to be treated as only for serviceand when it is the transfer of right to use.

44. A decision by the Court of Appeal In re: An Arbitrationbetween sea and land securities Ltd. and William Dickinson & Co.DLtd. The Alresford, (1942) 2 KB 65, has been relied upon in whichthe question arose of certain cesser of hire for the period occupied infitting the degaussing apparatus. Since the employment of the ship didnot come within the terms of clause 12 of the charter-party, nor did itconstitute a breach of contract by the owners. The fact that the ownersEhad the degaussing apparatus fitted while it was waiting to load hercargo did not result in her being withdrawn. It has been observed atthe outset that the respective rights and obligations of the two partiesto the time charter party must depend upon its written terms, for thereis no special law applicable to the particular form of contract. Theconcept of demise charter parties is becoming an obsolete form of timeFcharter party. The modern form of time charter party is one under whichshipowner agrees with the time charterer that during a certain namedperiod, the shipowner will render service as a carrier by his servantsand crew to carry the goods which are put on board his ship by thetime charterer. The words like, delivery, letting, or hiring are notGdeterminative of the nature of the contract, there is no quarrel with thesaid proposition. However, the crux is that it would depend upon theterms and conditions of the charter-party.

45. Reliance has also been placed on Scandinavian TradingTanker Co. A.B. v. Flota Petrolera Ecuatoriana, (1983) 2 LLR 253,Hwherein following observations have been made:

“A time charter, unless it is a charter by demise, with which yourLordships are not here concerned, transfers to the charterer nointerest in or right to possession of the vessel; It is a contractfor services to be rendered to the charterer by the shipownerthrough the use of the vessel by the shipowner’s own servants,the master and the crew, acting in accordance with suchdirections as to the cargoes to be loaded and the voyages to beundertaken as by the terms of the charter-party the charterer isentitled to give to them. Being a contract for services it is thusthe very prototype of a contract of which before the fusion oflaw and equity, a Court would never grant specific performance.Clarke v. Price, (1819) 2 Wils. Ch. 157; Lumley v. Wagner,(1852) 1 Dc G.M. & G. 604. In the event of failure to renderthe promised services, the party to whom they were to berendered would be left to pursue such remedies in damages forbreach of contract as he might have at law. But as an unbrokenline of uniform authority in this House, from Tankexpress (ubisup.) to The Chikuma [1981] 1 Lloyd’s Rep. 371; [1981] 1W.L.R. 314 has held, if the withdrawal clause so provides, theshipowner is entitled to withdraw the services of the vessel fromthe charterer if the latter fails to pay an installment of hire inprecise compliance with the provisions of the charter. So theshipowner commits no breach of contract if he does so, and thecharterer has no remedy in damages against him.”

Preceding discussion renders no help as it was not relating tothe charter by demise. In the instant case control, excusive use is givento the charterer for six months.

46. Reliance has also been placed on Port Line, Ltd. v. Ben LineSteamers, Ltd. (1958) 1 AER 787 in which the court has observed:

“The plaintiffs’ charterparty with Silver Line was a gross timecharter, not one by demise. It gave the plaintiffs no right ofproperty in or to possession of the vessel. It was one by whichSilver Line agreed with the plaintiffs that for thirty months fromMar. 9, 1955, they would render services by their servants andcrew to carry the goods which were put on the vessel by theplaintiffs.”

Again, the decision is based on the terms and conditions. Merelyby employing the crew to render the service by the owner, is notdecisive of the nature of charter.

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A47. In Torvald Klaveness A/S v. Arni Maritime Corporation(The Gregos”), 1993 (2) LLR 335, following observations have beenmade:

“A time charter is a contract under which the owner agrees withthe charterer that during a certain specified period he will renderBservices by his servants and crew to carry goods which are puton board his ship by the time charterer. The charterer is free todecide, within the terms of the charter party, what use he willmake of the vessel for its duration, e.g., by carrying goods himselfor by sub-chartering. The vessel never leaves the possession ofCthe owner, so that references to delivery and redelivery are notstrictly accurate, but those expressions are regularly used toidentify the time when the charter begins and ends.”

Merely rendering service by the servants and crew to carry thegoods will not make it a service contract. It depends upon the nature Dof each contract, and the terms and conditions agreed to. What is ofrelevance for our purpose is whether there is a transfer of right to use.

48. Reliance has also been placed on SkibsaktieselskapetSnefonn, Skibsaksjeselskapet Bergehus, and Sig. Bergesen D.Y. &Co. v. Kawasaki Kisen Kaisha Ltd. (The “Berge Tasta”), (1975) 1ELLR 422 in which as to time charter which is not a demise followingobservations have been made:

“Under a time charter-party, not being a charter by way of demise,the shipowner undertakes to make the vessel available to thecharterer for the purposes of undertaking ballast and loadedFvoyages as required by the charterer within a specified area overa stated period. The shipowner’s remuneration known as “timechartered freight” or “hire” is at a fixed rate for a unit of timeregardless of how the vessel is used by the charterer. Risk ofdelay thus falls on the charterer. The shipowner meets the costGof maintaining the vessel and paying the crew’s wages, but thecost of fuel and port charges fall on the charterer.

At the end of the period covered by the time charter the vesselis said to be “redelivered” to the shipowner. This is a misleadingterm for the vessel never leaves the possession of the shipowner.HAll that is meant is that the time charter then ends in exactly the same way as a voyage charter-party ends when the last cargois discharged.”

49. In Hyundai Merchant Marine Co. Ltd. v. GesuriChartering Co. Ltd. (The “Peonia”), (1991) 1 LLR 100, the followingobservations have been relied upon:

“The immediate legal background to the dispute is not nowcontroversial. A time charter-party such as this is a contract bywhich the shipowner agrees with the time charterer that duringa certain named period he will render services by his servantsand crew to carry the goods which are put on board his ship bythe time charterer (Sea and Land Securities Ltd. v. WilliamDickinson and Co. Ltd., (1942) 72 I.I.L. Rep. 159 at p. 162, col.2; [1942] 2 K.B. 65 at p. 69). It is for the time charterer todecide, within the terms of the charter-party, what use he willmake of the vessel. References to delivery and redelivery arestrictly inaccurate since the vessel never leaves the possessionof the shipowner, but the expressions are conventionally used todescribe the time when the period of the charter begins and ends(The Berge Tasta)”.

The decision lends no support in view of the terms and conditionsof the charter-party in question and the general discussion. Otherwise,also, it does not espouse cause concerning whether there is a right totransfer the use of the vessel.

50. In Scrutton on Charterparties and Bills of Lading, 20thEdn., Section IV dealing with the charter parties, following is the relevantdiscussion:

“Article 28 – Charterparties by Demise – Classification CHARTERPARTIES may be categorized according to whetheror not they amount to a demise or lease of the ship.

A charter by demise operates as a lease of the ship itself, towhich the services of the master and crew may or may not besuperadded. The charterer becomes for the time the owner ofthe vessel; the master and crew become to all intents his servants,and through them the possession of the ship is in him A

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AUnder a charter not by demise, on the other hand, the shipowneragrees with the charterer to render services by his master andcrew to carry the goods which are put on board his ship by oron behalf of the charterer. In this case, notwithstanding thetemporary right of the charterer to have his goods loaded andBconveyed in the vessel, the ownership and also the possessionof the ship remain in the original owner through the master andcrew, who continue to be his servants. …

Whether or not the charter amounts to a demise must turn onthe particular terms of the charter. “The question depends, whereCother things are not in the way, upon this: whether the ownerhas by the charter, where there is a charter, parted with the wholepossession and control of the ship, and to this extent, that he hasgiven to the charterer a power and right independent of him, andwithout reference to him to do what he pleases with regard tothe captain, the crew, and the management and employment ofDthe ship. That has been called a letting or demise of the ship.The right expression is that it is a parting with the wholepossession and control of the ship.”

“Time charters almost always contain expressions such as“letting,” “hiring,” “hire,” “delivery,” and “redelivery,” which areEreally apt only in charters by demise. These expressions serveto distinguish such charters from voyage charters, but they donot in themselves characterize such charters as charters bydemise.”

F51. It is apparent from the discussion mentioned above that theservices of the master and crew may or may not be superadded in thecase of demise. Whether or not charter amount to demise woulddepend upon the particular terms of the charter.

52. Halsbury’s Laws of England, 4[th] Edn., Vol. 43, has also beenGreferred to in which the following discussion has been made:

“402. Meaning of „contract by charterparty.“ A contract by acharterparty is a contract by which an entire ship or someprincipal part of her is let to a merchant, called „the charterer,“for the conveyance of goods on a determined voyage to one orHmore places, or until the expiration of a specified period. In the first case, it is called a „voyage charterparty,“ and in the seconda „time charterparty.“ Such a contract may operate as a demiseof the ship herself, to which the services of the master and crewmay or may not be added, or it may confer on the charterernothing more than the right to have his goods conveyed by aparticular ship, and, as subsidiary to it, to have the use of theship and the services of the master and crew.

403. Charterparty by demise. Charterparties by way of demiseare of two kinds: (1) charter without master or crew, or „bareboatcharter“, where the hull is the subject matter of the charterparty,and (2) charter with master and crew, under which the shippasses to the charterer in a state fit for the purposes of mercantileadventure. In both cases the charterer becomes for the time beingthe owner of the ship; the master and crew are, or become toall intents and purposes, his employees, and through them, thepossession of the ship is in him. The owner, on the other hand,has divested himself of all control either over the ship or overthe master and crew, his sole right being to receive the stipulatedhire and to take back the ship when the charterparty comes toan end. During the currency of the charterparty, therefore, theowner is under no liability to third persons whose goods may havebeen conveyed upon the demised ship or who may have donework or supplied stores for her, and those persons must look onlyto the charterer who has taken his place.

404. Charterparty which is not a demise. Although a charterpartywhich does not operate as a demoise confers on the chartererthe temporary right to have his goods loaded and conveyed inthe ship, the ownership remains in the original owner, and throughthe master and crew, who continue to be his employees, thepossession of the ship also remains in him. Therefore, theexistence of the charterparty does not necessarily divest theowner of liability to third persons whose goods may have beenconveyed on the ship, nor does it deprive him of his rights asowner.

405. Test whether charterparty operates as demise. Whether acharterparty operates as a demise or not is a question ofconstruction, to be determined by reference to the language of AB

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Athe particular charterparty. The principal test to be applied iswhether the master is the employee of the owner or of thecharterer. Even where the charterparty provides for thenomination of the master by the charterer, he must be regardedas the owner’s employee if the effect of the charterparty is thatBhe is to be paid or dismissed by the owner and that he is to besubject to the owner’s orders as to navigation. However, if thecharterparty is otherwise to be regarded as a demise, it isimmaterial that the owner reserves the right, in certaincircumstances, of removing the master and appointing anotherin his place, or of appointing the chief engineer.”CIn a charter-party by demise, it may be charter without masteror crew or bareboat charter, and another may be a charter with masterand crew under which ship passes to the charterer for the purposes ofmercantile adventure. As held in this case, full control has been given,Dand use is exclusively for the charterer. He has the right to use thespace and burden. The discussion in Halsbury’s also makes it clear thateach and every charter-party need not be a service contract to provideservices only.

53. The argument based upon the foreign courts decisions as toEthe charter agreements are only for service purpose, is not correct. Asalready discussed, even in the abovementioned foreign court’s decisions,it depends upon the charter-party, and there is no super-check formulato find out the nature of the contract. It depends upon the terms andconditions of each contract. Merely use of specific words, as mentionedFabove, is not determinative, but the real crux is to be seen as per relevantconditions as agreed to between the parties.

54. When we consider the charter-party in question in the contextof applicable law, particularly in view of the constitutional provisions ofArticle 366(29A)(d), we find that there is transfer of right to use tangibleGgoods, which is determinative of deemed sale as per the Constitutionof India and provisions of section 5C reflecting the said intendment.We are of the considered opinion that there is transfer of right to useexclusively given to charterer for six months, and the vessel has beenkept under the exclusive control. The charterer qualifies the test laidHdown by this court in BSNL (supra).

55. Mr. Mohan Parasaran, learned senior counsel has alsoreferred to New Mangalore Port Harbour Craft Rules, 1976. He hasdrawn our attention to Rule 4 relating to licensing of Harbour Craftaccording to which an application has to be filed by the owner, furnishingthe required information concerning the vessel/harbor craft. A licensehas to be produced by Tindal, as per Rule 6, whenever called upon byDeputy Conservator. He has also referred to Rule 8 which providesthat in case of change of ownership of licensed harbor craft, the licenseshall cease to be valid on expiry of six days. Changes in crew orcarrying capacity of licensed harbor craft has to be reported to theDeputy Conservator. In case of any alteration in the cabin capacity,the licence is liable to be cancelled. The submission made by learnedsenior counsel is that as per the scheme of the Harbour Craft Rules;also, the owner retains the control of the vessel. In our opinion, thesubmission cannot be accepted. Merely by the provisions mentionedabove as to license, its production/change of ownership etc., it cannotbe said that the owner has not transferred the right to use the vessel.The ownership in such a deemed sale is retained by owner. He doesnot cease to be an owner by transferring right to use the property.Merely by the fact that a license to be obtained with certain stipulationsand to be produced by Tindal on being demanded and change incapacityto be reported to the Deputy Conservator, the provisions are not of anyhelp for interpreting the Charter Party Agreement, and to decide thequestion whether there is a transfer of right to use the vessel.

In Re: Situs of the agreement

56. The next question for consideration is whether the State ofKarnataka has power under section 5C of the Act to exact sales-taxthough charter-party has been signed in Mangalore in view of the factthat vessel was to be used in territorial waters, it was open to the StateGovernment to impose and realize the sales-tax on the basis of situsof agreement.

57. For the realization of tax imposed within the ken of powerunder Article 366(29A)(d), it is not material where the goods are passed,but the situs of the agreement is determinative for the realization oftax. In this regard decision of Constitution Bench of this Court in 20[th]Century (supra) is relevant, in which this Court has discussed the AB

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Aconcept of deemed sale by a legal fiction created as per Article366(29A) (e to f) and observed:

“21. It may be noted that the transactions contemplated undersub-clauses (a) to (f) of clause (29-A) of Article 366 are notactual sales within the meaning of “sale” but are deemed salesby a legal fiction created therein. The situs of sale can only befixed either by the appropriate legislature or by judge-made law,and there are no settled principles for determining the situs ofsale. There are conflicting views on this question. One of theprinciples providing a situs of sale was engrafted in theexplanation to clause (1)(a) of Article 286, as it existed prior tothe Constitution (Sixth Amendment) Act, which provided that thesitus of sale would be where the goods are delivered forconsumption. The second view is, the situs of sale would be theplace where the contract is concluded. The third view is that theplace where the goods are sold or delivered would be the situsof sale. The fourth view is that where the essential ingredients,which complete a sale, are found in the majority would be thesitus of sale. There would be no difficulty in finding out a situsof sale where it has been provided by legal fiction by theappropriate legislature. In the present case, we do not find thatParliament has, by creating any fiction, fixed the location of salein case of the transfer of right to use goods. We, therefore, haveto look into the decisional law.

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24. The aforesaid decisions unambiguously laid down that wheresitus of sale has not been fixed or covered by any legal fictioncreated by the appropriate legislature, the location of sale wouldbe the place where the property in goods passes. TheConstitution Bench held that it was the passing of the propertywithin the State that was intended to be fastened on for thepurpose of determining whether the sale was “inside” or“outside” the State.

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25. It was then urged on behalf of the respondents that it is thelocation of goods where they are put to use, which would furnishthe situs of sale. According to them, there would be no completedtransfer of right to use goods until the goods are delivered. Wehave traced the legislative history of sales tax in this country only H

to show that excepting where the appropriate legislature bycreating legal fiction fixed the situs of sale on location or deliveryof goods for consumption like the omitted explanation to Article286(1)(a), there is no authority to show that mere location ordelivery of goods would be the situs of sale. Here, we wouldlike to cite an appropriate illustration given in the decision in theBengal Immunity case, AIR 1955 SC 661, only to resolve thecontroversy before us. The illustration given is as under:

“Take, for instance, a case where both the seller and the buyerreside and carry on business in Gurgaon in the State of Punjab.Let us say that the seller has a godown in the State of Delhiwhere his goods are stored and that the buyer also has a retailshop at Connaught Circus also in the State of Delhi. The buyerand the seller enter into a contract at Gurgaon for the sale ofcertain goods and a term of the contract is that the goodscontracted to be sold will be actually delivered from the seller’sgodown to the buyer’s retail shop, both in the State of Delhi, forconsumption in the State of Delhi. Pursuant to this contract madein Gurgaon in the State of Punjab, the buyer pays the full priceof the goods at Gurgaon and the seller hands over to the buyeralso at Gurgaon a delivery order addressed to the seller’sgodown-keeper in Delhi to deliver the goods to the buyer’s retailshop.

As a direct result of this sale, the seller’s godown-keeper, on thepresentation of this delivery order, actually delivers the goods tothe buyer’s retail shop at Connaught Circus for consumption inthe State of Delhi. On one view of the law, the ‘situs’ of such asale would be Gurgaon. We need not decide that it is, becausethat type of case is not before us and there may be other viewsto consider, but it is certainly a possible view.

It is also possible to hold that this is not inter-State trade orcommerce, because there is no movement of goods across aState boundary. Again, we need not decide that because that alsomay be controversial. But given these two postulates, thetransaction would fall squarely within the explanation, and yet itwould not come within clause (2), for there is no movement ofthe goods across the border of any State and both the seller and ABC

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Athe buyer are in the same place. Surely, the explanation will, ‘inpraesenti,’ govern such cases irrespective of whether Parliamenthas lifted the ban under clause (2).

If these postulates are accepted then by virtue of clause (1)(a)read with the explanation the State of Delhi alone will be entitledBto impose a tax on such a sale or purchase and the State ofPunjab will be precluded from doing so by reason of the fictional‘situs’ assigned to such a sale or purchase by the explanation,although the contract was made, price was paid, and symbolicalor constructive delivery of the goods by the handing over of theCdelivery order took place in Gurgaon in the State of Punjab.”

We, therefore, find that the location or delivery of goods withinthe State cannot be made a basis for levy of tax on sales of goods.Under general law, merely because the goods are located or deliveryof which has been effected for use within the State would not be theDsitus of deemed sale for levy of tax if the transfer of right to use hastaken place in another State. Therefore, if the contention on behalf ofthe respondents that there would be no completed transfer of right touse goods till the goods are delivered is to prevail, then the respondentsare further required to show that the contract of transfer of right toEuse goods is also entered into in the said State in which the goods arelocated or delivered for use. The State cannot levy a tax on the basisthat one of the events in the chain of events has taken place within theState. The delivery of goods may be one of the elements of transferof right to use, but the same would not be the condition precedent forFa contract of transfer of right to use goods. Where a party has enteredinto a formal contract, and the goods are available for deliveryirrespective of the place where they have located the situs of such salewould be where the property in goods passes, namely, where thecontract is entered into.”

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This Court has observed that the location of the delivery of goodscannot be made the basis for the levy of tax on the sale of goods.Where a party has entered into a formal contract, and the goods areavailable for delivery irrespective of the place where they are located,the situs of sale where the property or goods passes, would be at theHplace where the contract has been entered into.

58. This Court in the 20[th] Century (supra) has considered forArticle 366(29A)(d), the taxable event is the transfer of the right touse the goods regardless of when or whether the goods are deliveredfor use. The deemed sale takes place at the site where the right to usethe goods is transferred. It is of no relevance where the goods aredelivered under the right to transfer to use them. In the present case,the agreement has been admittedly signed in Mangalore, and the vesselis used in the territorial waters, which is as per the submission of thecompany, fully in territory of the Union of India. It makes no differenceas the situs of the deemed sale is in Mangalore. Thus, the liability topay tax under the Act cannot be countenanced. This Court in the 20[th]Century (supra) has observed:

“26. The next question that arises for consideration is, where isthe taxable event on the transfer of the right to use any goods.Article 366(29-A)(d) empowers the State Legislature to enacta law imposing sales tax on the transfer of the right to use goods.The various sub-clauses of clause (29-A) of Article 366 permitthe imposition of tax thus: sub-clause (a) on transfer of propertyin goods; sub-clause (b) on transfer of property in goods; sub-clause (c) on delivery of goods; sub-clause (d) on transfer ofthe right to use goods; sub-clause (e) on supply of goods; andsub-clause (f) on supply of services. The words “and suchtransfer, delivery or supply …” in the latter portion of clause (29-A), therefore, refer to the words transfer, delivery, and supply,as applicable, used in the various sub-clauses. Thus, the transferof goods will be a deemed sale in the cases of sub-clauses (a)and (b), the delivery of goods will be a deemed sale in case ofsub-clause (c), the supply of goods and services respectively willbe deemed sales in the cases of sub-clauses (e) and (f) and thetransfer of the right to use any goods will be a deemed sale inthe case of sub-clause (d). Clause (29-A) cannot, in our view,be read as implying that the tax under sub-clause (d) is to beimposed not on the transfer of the right to use goods but on thedelivery of the goods for use. Nor, in our view, can a transfer ofthe right to use goods in sub-clause (d) of clause (29-A) beequated with the third sort of bailment referred to in Bailmentby Palmer, 1979 Edn., p. 88. The third sort referred to there iswhen goods are left with the bailee to be used by him for hire, AB

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which implies the transfer of the goods to the bailee. In the caseof sub-clause (d), the goods are not required to be left with thetransferee. All that is required is that there is a transfer of theright to use the goods. In our view, therefore, on a plainconstruction of sub-clause (d) of clause (29-A), the taxable eventis the transfer of the right to use the goods regardless of whenor whether the goods are delivered for use. What is required isthat the goods should be in existence so that they may be used.And further contract in respect thereof is also required to beexecuted. Given that, the locus of the deemed sale is the placewhere the right to use the goods is transferred. Where the goodsare when the right to use them is transferred is of no relevanceto the locus of the deemed sale. Also of no relevance to thedeemed sale is where the goods are delivered for use pursuantto the transfer of the right to use them, though it may be that inthe case of an oral or implied transfer of the right to use goods,it is affected by the delivery of the goods.

27. Article 366(29-A)(d) further shows that the levy of tax isnot on the use of goods but on the transfer of the right to usegoods. The right to use goods accrues only on account of thetransfer of right. In other words, the right to use arises only onthe transfer of such a right, and unless there is a transfer of theright, the right to use does not arise. Therefore, it is the transfer,which is a sine qua non for the right to use any goods. If thegoods are available, the transfer of the right to use takes placewhen the contract in respect thereof is executed. As soon asthe contract is executed, the right is vested in the lessee. Thus,the situs of a taxable event of such a tax would be the transferthat legally transfers the right to use goods. In other words, ifthe goods are available irrespective of the fact where the goodsare located, and a written contract is entered into between theparties, the taxable event on such a deemed sale would be theexecution of the contract for the transfer of right to use goods.But in case of an oral or implied transfer of the right to use goods,it may be affected by the delivery of the goods.

28. No authority of this Court has been shown on behalf of therespondents that there would be no completed transfer of right

to use goods unless the goods are delivered. Thus, the deliveryof goods cannot constitute a basis for the levy of tax on thetransfer of right to use any goods. We are, therefore, of the viewthat where the goods are in existence, the taxable event on thetransfer of the right to use goods occurs when a contract isexecuted between the lessor and the lessee and situs of sale ofsuch a deemed sale would be the place where the contract inrespect thereof is executed. Thus, where goods to be transferredare available, and a written contract is executed between theparties, it is at that point situs of a taxable event on the transferof right to use goods would occur, and situs of sale of such atransaction would be the place where the contract is executed.”

40. A perusal of Explanation 3(d) to Section 2(t) shows that thetransfer of right to use any goods would be deemed to have takenplace in the State of Karnataka if the goods are for use withinthe State irrespective of the place where the contract of transferof right to use the goods is executed. The said Explanation 3(d)to Section 2(t) widens the ambit of the definition of “sale” byincluding sales outside the State of Karnataka and the sales whichoccasioned import of goods into India, merely on the premise thatgoods put to use are located within the State of Karnatakairrespective of the place where the contract or transfer has takenplace. This explanation is in excess of legislative power underEntry 54 of List II of the Seventh Schedule. Another importantaspect to notice is that the provision of Section 5(3), whichprovides for single-point taxation, has been omitted in itsapplication to Section 5-C. Therefore, Explanation 3(d) to Section2(t) of the Act has to be held in excess of the legislative powerconferred on the State Legislature under Entry 54 of List II ofthe Seventh Schedule of the Constitution following the reasoninggiven while discussing the Maharashtra Act. We, accordingly,direct that Explanation 3(d) to Section 2(t) of the Act shall beread down to this effect that it would not be applicable to thetransactions of transfer of right to use any goods if such deemedsale is (i) an outside sale; (ii) sale in course of the import of thegoods into or export of the goods out of the territory of India;and (iii) an inter-State sale.”

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A59. This Court also dealt with proposition whether the State cancreate a deemed fiction that in case the goods are for use within theState irrespective of the place where the contract of transfer of rightto use the goods is made. That is not the question involved in the presentmatter. The situs of the agreement is relevant, which is admittedlyBwithin the territory of Karnataka. The situs of the deemed sale is inMangalore, and the decision of a Constitution Bench of this Court inthe 20[th] Century (supra) is binding on us and effectively repels thesubmission to the contrary.

60. In Aggarwal Brothers v. State of Haryana & Anr., (1999)C9 SCC 182, the submission was raised that to make a deemed sale theremust be a legal transfer of goods or that the transaction must be like alease, was not accepted by this Court. It has distinguished the transferof the right to use the goods for consideration. Following observationshave been made:

D“3. The argument of learned counsel for the assessees goes thus:Entry 54 of Part II of Schedule VII of the Constitution enablesthe State to levy “taxes on the sale or purchase of goods otherthan newspapers …”. Article 366 sets down definitions for thepurposes of the Constitution. Clause (29-A) thereof refers to “taxon the sale or purchase of goods,” and it includesE“(d) a tax on the transfer of the right to use any goods for anypurpose (whether or not for a specified period) for cash, deferredpayment or other valuable consideration”.

In the submission of learned counsel, having regard to Entry 54Fof Part II of Schedule VII, the transfer contemplated by sub-clause (d) of clause (29-A) of Article 366 is a legal transfer ofthe right in the goods. It has to be a transfer of goods. It has tobe permanent. It has to be something like a lease. The giving ofgoods on hire is not such a transfer and, therefore, falls outsideGthe ambit of sub-clause (d) of clause (29-A) of Article 366.Learned counsel referred to para 40 of the judgment of this Courtin Builders’ Assn. of India v. Union of India, (1989) 2 SCC645 which says: (SCC p. 675)

“As the Constitution exists today the power of the States to levyHtaxes on sales and purchases of goods including the ‘deemed’

sales and purchases of goods under clause (29-A) of Article 366is to be found only in Entry 54 and not outside it.”

4. The language used in Section 2(j)(iv) and 2(l)(iv) of the saidAct is the language used in Article 366(29-A)(d), Section 2(j)dealing with the purchase and Section 2(l) with the sale. Theargument before us is, therefore, not an argument on theconstitutionality of these provisions of the said Act but of theirinterpretation and the application thereof to the facts of thepresent case.

5. The said Act defines “sale” to mean the transfer of propertyin goods for cash or deferred payment or other valuableconsideration and includes the “transfer of the right to use any goods for any purpose(whether or not for a specified period) for cash, deferredpayment or other valuable consideration.”

Such transfer of the right to use goods for consideration is“deemed” to be a sale. The provision expressly speaks of the“transfer of the right to use goods” and not of the transfer ofgoods. There is, therefore, no merit in the submission that to bedeemed sale within the meaning of the provision as mentionedabove of the said Act, there must be a legal transfer of goods orthat the transaction must be like a lease.

6. Where there is a transfer of a right to use goods for aconsideration, the requirement of the above-mentioned provisionof the said Act is satisfied, and there is deemed to be a sale. Inthe instant case, the assessees owned shuttering. Theytransferred the shuttering for consideration to builders and buildingcontractors for use in the construction of buildings. There can,therefore, be no doubt that the requirements of a deemed salewithin the meaning of the above-mentioned provision of the saidAct are satisfied.”

61. A reference has also been made to the decision in the Stateof Orissa & Anr. v. Asiatic Gases Ltd., (2007) 5 SCC 766 in whichwhat is the nature of, transfer of right to use the goods, has beendiscussed and Aggarwal Brothers (supra) has been relied upon, thus:

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A“8. Lastly, it is important to bear in mind that Section 2(g)(iv)was placed on the statute in terms of Article 366(29-A)(d) ofthe Constitution. In Aggarwal Bros. v. State of Haryana, (1999)9 SCC 182 a Division Bench of this Court has held that theprovision under Section 2(l)(iv) of the Haryana General SalesBTax Act, 1973 [which was similar to Section 2(g)(iv) of this Act]expressly spoke of “transfer of the right to use goods” and not“transfer of goods”. In that matter, it was argued on behalf ofthe assessee that in the case of a deemed sale within the meaningof Section 2(l)(iv), there must be a legal transfer of goods. Thisargument was rejected by this Court, stating that the levy of taxCwas not on transfer of the goods itself, but the levy was on thetransfer of the right to use such goods for consideration. In ourview, the judgment of this Court in Aggarwal case wouldsquarely apply to the present case. In the present case, as statedabove, the cylinders filled with medical oxygen/industrial gasDwere loaned to the customers. The loan was free from thepayment of charges for 14 days. The over retention charges werelevied after 14 days. In the circumstances, the levy was on thetransfer of the right to use the goods for consideration.”

62. It was submitted on behalf of appellant that the amendmentEto Finance Act had been made and a clarification dated 10.5.2008 hasbeen issued that service tax is to be levied on the Charter PartyAgreement. Hence it was urged that it cannot be treated as that ofdeemed sale. The said clarification as to service tax does not advanceany cause as the levy of service tax is permissible or not is not thequestion to be examined by this Court. The question germane to theFinstant matter is not whether service tax can be levied. The questioninvolved in the case is only to the extent whether the State of Karnatakacan realize the sales tax on deemed sale under section 5C of the KSTAct in view of the provisions contained in Article 366(29A)(d) of theConstitution. Thus, we refrain from going into the effect of the aforesaidGnotification/clarification as to service tax. That is not the questioninvolved in the matter.

In Re: Rights and liabilities in territorial waters

63. With respect to territorial waters, to what extent the coastalHState can exercise power has been considered by the High Court, and specific findings have been recorded. The High Court has gone intothe question of whether the territorial waters abutting the landmass formpart of the State of Karnataka. It was not disputed that the extent ofterritorial waters is up to 12 nautical miles from the landmass that isthe baseline. Article 297 has been considered by the High Court andthe Lists in the 7[th] Schedule of the Constitution. Entries 25 to 27 and30 of List I, Entry 32 of List III, i.e., Concurrent List have beenreferred.

64. Learned senior counsel appearing for the parties have alsoreferred to various decisions and the debates in the ConstituentAssembly and answers given by Dr. B.R. Ambedkar as to scope ofArticle 293 of the Constitution. The High Court has also relied uponthe definition of State as provided in section 2(j) of the Marine & FishingAct, 1986, Entries 13 and 21 of State List II of the 7[th] Schedule and inrespect of fisheries Entry 21 of List II.

65. We need not go into the aforesaid questions. However, asthe High Court has given a finding, and on being impleaded, coastalStates have filed their response as notices were issued to them. Weneed not go into the question in respect of the right of the States andthe Central Government as to territorial waters at all because of ourfinding concerning exaction of tax under the KST Act owing to situswhere the transfer right to use the vessel, which is a deemed sale, hadtaken place. As such, we leave the question open and dilute the findingrecorded by the High Court in this regard.

66. Charter party has been entered into admittedly in Mangalore,and the ship is used at the New Mangalore Port by the New MangalorePort Trust. Though vessel was used in the territorial waters, makes nodifference with respect to exigibility of sales-tax under the provisionsof the KST Act in view of the decision of this Court in 20[th] Century(supra), which has been affirmed in BSNL (supra) and has been followedin various other decisions of this Court.

67. Lastly, it was submitted that the High Court ought to haveremitted the matter to the concerned assessing authorities to decide theaspect that whether there was deemed sale in view of transfer of rightto use vessel. The submission is, untenable as the appellant companyfiled the writ petition, and a writ appeal too was filed by it. They havesubmitted on merits not only before the High Court but this Court as AB

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Awell, after having failed to convince on merits they have raised aforesaidsubmission that too at the fag end as an alternative. They havequestioned the notice and invited a decision. Once it has gone againstthem; they cannot submit that this question should be left to beconsidered to be taken in another round of litigation for adjudication byBthe concerned tax authorities making an assessment. The submissionis wholly untenable and stands repelled.

68. Resultantly, we hold that the Charter Party Agreementtantamount to a deemed sale as there was a transfer of right to usethe vessel as provided in Article 366(29A)(d) read with section 5C orCsection 2(j) of the Karnataka Sales Tax Act. Thus, the transaction isliable to be taxed by the concerned authorities in the State of Karnataka.However, for the reasons recorded by this Court in the judgment, theappeal is without merits and is dismissed. No costs.

DKalpana K. Tripathy

Appeal dismissed.

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